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L&T: Margin contraction mars bottomline - Views on News from Equitymaster
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L&T: Margin contraction mars bottomline
Aug 3, 2015

Larsen & Toubro (L&T) has announced the first quarter results of financial year 2015-2016 (1QFY16). The company has reported 6.7% YoY growth in sales while net profits have fallen 37% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated net sales for the company grew by 6.7% YoY during 1QFY16.
  • Operating expenses for the company increased by 9.1% YoY. Operating profit fell by 8.8% YoY in 1QFY16 as a result. Consequently, operating margin contracted to 11.3% in 1QFY16 from 13.2% in the corresponding quarter of last year.
  • Net profit fell by 37% YoY during the quarter due to a dull performance at the operating level along with exceptional gains during the previous year's quarter leading to a high base. Recurring net profit, i.e. excluding exceptional gains, fell by 15% YoY.
  • The company received an order inflow of Rs 264 bn during the quarter, a fall of 21% YoY. The total order backlog at the end of the quarter for the company stood at Rs 2,390 bn; growing by 22% YoY.

Financial performance snapshot (Consolidated)
(Rs m) 1QFY15 1QFY16 Change
Sales 189,748 202,522 6.7%
Expenditure 164,637 179,620 9.1%
Operating profit (EBDITA) 25,110 22,902 -8.8%
Operating profit margin (%) 13.2% 11.3%  
Other income 2,770 2,574 -7.1%
Interest 7,744 7,067 -8.7%
Depreciation 8,073 6,222 -22.9%
Exceptional items  2,493   -
Profit before tax 14,556 12,186 -16.3%
Tax 4,490 5,458 21.6%
Extraordinary items, net of tax - -  
Profit after tax/(loss) 10,066 6,728 -33.2%
Net profit margin (%) 5.3% 3.3%  
Share in profit of associates 16 19  
Minority interest 413 685  
Profit after share of associates & minority interest 9,669 6,062 -37.3%
No. of shares   930.3  
Basic reported earnings per share (Rs)*   47.3  
P/E ratio (x)*   37.8  
* On a trailing 12-months basis

What has driven performance in 1QFY16?
  • The topline performance was boosted by a good show in the company's infrastructure, IT & technology, financial services and hydrocarbons, power and financial services segments.

  • International revenues during the quarter constituted 32% of the total revenues.

  • In terms of order inflows, international orders constituted 31% of those during the quarter. Major orders were secured in the infrastructure and hydrocarbons business segments.

  • The international order book made up 26% of the order book as at the end of the quarter.

  • Segment wise Power, Metallurgical, heavy engineering and developmental projects segments registered a sharp decline in EBIT margin; while EBIT margin for infrastructure, hydrocarbon and IT segments improved significantly.

    Segment-wise performance (Consolidated)
    (Rs m) 1QFY15 1QFY16 Change
    Infrastructure 75,725 84,750 11.9%
    % share 38% 41%  
    EBIT margin 7.8% 8.8%  
    Power 10,003 11,236 12.3%
    % share 5% 5%  
    EBIT margin 14.1% 4.0%  
    Metallurgical and Material Handling 9,407 5,518 -41.3%
    % share 5% 3%  
    EBIT margin 9.5% -4.3%  
    Heavy Engineering 8,625 6,543 -24.1%
    % share 4% 3%  
    EBIT margin 3.2% -0.6%  
    Electrical & Automation 10,543 11,352 7.7%
    % share 5% 5%  
    EBIT margin 4.9% 6.0%  
    Hydrocarbons 15,573 22,073 41.7%
    % share 8% 11%  
    EBIT margin -60.5% 1.8%  
    IT & Technology Services 17,509 21,164 20.9%
    % share 9% 10%  
    EBIT margin 16.9% 18.2%  
    Financial Services 14,827 17,833 20.3%
    % share 8% 9%  
    EBIT margin 22.9% 13.7%  
    Developmental Projects 21,481 12,042 -43.9%
    % share 11% 6%  
    EBIT margin 57.1% 17.7%  
    Others 13,364 16,314 22.1%
    % share 7% 8%  
    EBIT margin 14.2% 16.0%  
    Total Revenue* 197,055 208,825 6.0%
    * Excluding inter-segment adjustments & excise duty
What to expect?
L&T's performance at the operating and bottom line level looks weak. However, in the case of a projects oriented engineering company, quarterly revenue and margin cannot suggest a specific growth trend. This is because there is a non-linearity in execution of projects as well as booking of margins depending on certain milestones.

As per the management, improved macroeconomic trends were witnessed in the economy during the quarter gone by. The capital expenditure and investment climate along with the domestic business environment continued to remain subdued during the quarter on the back of the prevailing global uncertainties and the unhurried pace of reforms in India. The company has highlighted the fact that the domestic infrastructure sector still awaits the translation of various policy and budgetary initiatives into definitive capital expenditure by corporates. While the visibility of outlay by public sector companies seems to have improved, private sector investment in the industrial sector is continues to be constrained by weak demand, low commodity prices along with under utilization of existing capacities.

At the current price of Rs 1,790, the stock trades at 37.8 times its reported trailing twelve months earnings. We are in the process of updating our FY18 estimates for the stock and shall soon update investors with a revised view, if any, and target price on the stock.

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