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L&T: Shines amidst despair - Views on News from Equitymaster
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L&T: Shines amidst despair
Oct 15, 2008

Performance summary
  • Standalone net sales grow by a robust 40% YoY during 2QFY09. Growth aided by a 41% YoY growth in sales of the engineering and construction business - segment's order book grows by 90% YoY during the quarter. Order backlog at the end of September 2008 stood at Rs 609 bn, including 17% of international orders.
  • EBIDTA margins contract by 0.2% YoY on the back of higher costs of construction material and sub-contracting charges (both as percentage of sales).
  • Net profits increase by 32% YoY, although remaining lower as compared to topline growth on account of contraction in operating margins and higher interest expenses.


Financial performance snapshot (Standalone)
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Sales 55,021 76,864 39.7% 100,078 145,912 45.8%
Expenditure 50,049 70,095 40.1% 89,958 132,359 47.1%
Operating profit (EBDITA) 4,972 6,768 36.1% 10,120 13,554 33.9%
Operating profit margin (%) 9.0% 8.8%   10.1% 9.3%  
Other income 1,124 1,559 38.7% 2,322 3,366 45.0%
Interest 132 690 421.1% 290 1,072 270.3%
Depreciation 483 731 51.2% 907 1,389 53.1%
Profit before tax 5,481 6,907 26.0% 11,245 14,458 28.6%
Tax 2,001 2,304 15.2% 3,996 4,831 20.9%
Profit after tax/(loss) 3,480 4,603 32.3% 7,249 9,627 32.8%
Net profit margin (%) 6.3% 6.0%   7.2% 6.6%  
No. of shares# 286.8 585.2   286.8 585.2  
Diluted earnings per share (Rs)*   41.2     41.2  
P/E ratio (x)*   22.0     22.0  
* On a trailing 12-months basis
# Adjusted for the 1:1 bonus issue

What has driven performance in 2QFY09?
    • L&T grew its standalone sales at a robust rate of 40% YoY during 2QFY09. This was on the back of a strong 41% YoY growth in the company's E&C division (76% of total sales during the quarter). Growth in this segment was aided by the ongoing execution of some large-scale projects. This division recorded an order inflow of Rs 104 bn during the quarter, which was a growth of 90% YoY. At the end of September 2008, the segment had an order backlog of Rs 609 bn, of which 17% was international orders.

      As for the company's electrical and electronics (E&E) business, sales grew by a marginal 13% YoY during the quarter. The management has attributed this lacklustre performance to a severe liquidity crunch in the economy and rising interest cost, which adversely impacted the demand for its products & services. The segment profitability for the quarter was under strain, due to higher input costs, lower capacity utilisation and competitive pressures constraining the ability to pass through the cost increases to the customers. The third business of Machinery & Industrial Products (MIP) recorded a growth of 16% YoY during the quarter.

      Segment-wise performance (Standalone)
      (Rs m) 2QFY08 2QFY09 Change 1HQFY08 1HFY09 Change
      Engineering & Construction            
      Revenue 42,599 59,896 40.6% 77,545 115,313 48.7%
      % share 74.0% 76.4%   73.8% 77.1%  
      EBIT margin 10.7% 10.8%   9.7% 10.3%  
      Electrical & Electronics            
      Revenue 6,717 7,605 13.2% 12,128 13,381 10.3%
      % share 11.7% 9.7%   11.5% 8.9%  
      EBIT margin 16.4% 11.1%   15.5% 11.3%  
      Machinery & Industrial Products            
      Revenue 5,917 6,846 15.7% 10,144 13,181 29.9%
      % share 10.3% 8.7%   9.7% 8.8%  
      EBIT margin 14.7% 20.0%   17.4% 21.5%  
      Others            
      Revenue 2,329 4,021 72.6% 5,243 7,780 48.4%
      % share 4.0% 5.1%   5.0% 5.2%  
      EBIT margin 7.1% 5.4%   5.5% 6.0%  

    • L&T's operating margins declined marginally by 0.2% YoY during 2QFY09. This was on account of higher costs of construction material and sub-contracting charges (both as percentage of sales). Based on segments, while the E&C and MIP segments recorded expansion in EBIT margins, there was a contraction in profitability of the E&E business.

    • On the back of strong topline growth and stable operating margins, L&T's bottomline grew by 32% YoY during 2QFY09. The growth was however impacted by a contraction in operating margins and substantially higher interest costs (up 421% YoY).

    • L&T's subsidiaries continue to do well. While the IT subsidiary, L&T Infotech recorded 27% YoY and 15% YoY growth in sales and PAT respectively during 1HFY09, L&T Finance recorded growth of 49% YoY and 12% YoY respectively.

    What to expect?
    At the current price of Rs 886, the stock is trading at a multiple of 11.8 times our estimated FY11 consolidated earnings. Apart from bright prospects in India, L&T's management is upbeat on the Middle East market and sees good growth in that region going forward. The company is working on strategies to counter the consequences of an investment slowdown, in light of the deteriorating credit conditions. The focus over the past few years on geographical diversification and the efforts towards development of its new business lines, such as power and railways, is expected to provide it adequate business opportunities in the medium to long term.

    Overall, the company expects its order book to grow by 30% YoY during the current fiscal. The commencement of production at its units to handle contracts in the power, shipbuilding and railway sectors is a positive step in this direction. Considering the initiatives that L&T is taking in terms of restructuring its businesses and diversifying into fast growing areas like shipbuilding and power, we maintain our positive view on the stock from a 2 to 3 years perspective.

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