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L&T: Execution uptick propels growth

Aug 8, 2011

Larsen & Toubro (L&T) has announced the first quarter results of financial year 2011-2012 (1QFY12). The company has reported 21.1% YoY and 12.0% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone net sales grow by 21.1% YoY during 1QFY12.
  • Operating profits increase 12.1% YoY in 1QFY12. However, operating margins decline 90 bps to 11.9% during the quarter.
  • Net profits increase by 12.0% YoY during the quarter.

Financial performance snapshot (Standalone)
(Rs m) 1QFY11 1QFY12 Change
Sales 78,312 94,826 21.1%
Expenditure 68,262 83,561 22.4%
Operating profit (EBDITA) 10,050 11,265 12.1%
Operating profit margin (%) 12.8% 11.9%  
Other income 2,156 2,962 37.4%
Interest 1,292 1,613 24.9%
Depreciation 1,142 1,679 47.0%
Profit before tax 9,773 10,935 11.9%
Tax 3,112 3,474 11.6%
Profit after tax/(loss) 6,662 7,462 12.0%
Net profit margin (%) 8.5% 7.9%  
No. of shares   610.0  
Basic reported earnings per share (Rs)*   66.52  
P/E ratio (x)*   24.5  
* On a trailing 12-months basis

What has driven performance in 1QFY12?
  • L&T grew its standalone sales by around 21.1% YoY during 1QFY12. This was on the back of a 22.8% YoY growth in the company's Engineering & Construction (E&C) division, well supported by 26.3% YoY growth in the Machinery and Industrial products division. Despite a sluggish macro-environment the E&C segment bagged orders aggregating to Rs 144.1 bn during the quarter. However, operating margins for the segment stood at 10% as certain high value jobs did not reach the threshold for margin recognition.

    Segment-wise performance (Standalone)
    (Rs m) 1QFY11 1QFY12 Change
    Engineering & Construction
    Revenue 65,961 80,994 22.8%
    % share 82% 83%  
    EBIT margin 12.4% 10.0%  
    Electrical & Electronics
    Revenue 7,421 7,462 0.5%
    % share 9% 8%  
    EBIT margin 9.9% 8.3%  
    Machinery & Industrial Products
    Revenue 5,467 6,904 26.3%
    % share 7% 7%  
    EBIT margin 20.7% 17.7%  
    Revenue 1,201 1,990 65.6%
    % share 2% 2%  
    EBIT margin 27.9% 21.2%  
    Revenue 80,051 97,350 21.6%
    * Excluding inter-segment adjustments

  • Growth in the Machinery & Industrial products was aided by higher demand from construction, mining and industrial sectors. However, Electrical & Electronics segment reported muted growth due to slowdown in exports and low demand from the domestic market.

  • L&T's operating margins declined during the quarter due to commodity price inflation Operating expenditure as a percentage of sales increased from 87.2% in 1QFY11 to about 88.1% in 1QFY12 leading to margin erosion.

  • Overall, the company garnered fresh orders to the tune of Rs 161.9 bn during the quarter. At the end of June 2011, L&T had an order backlog of Rs 1.36 trillion. Major orders came from buildings and factories, infrastructure, power generation and transmission & distribution.

  • L&T's profits grew by 12.0% YoY during 1QFY12. Increase in interest and depreciation expenses impacted the profit growth during the quarter.

What to expect?

At the current price of Rs 1,423, the stock is trading at a multiple of 15.0 times our estimated FY14 consolidated earnings. Taking into consideration the current valuations we recommend a "Hold" on the stock.

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