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L&T: The other income booster
Oct 18, 2010

L&T declared its 2QFY11 results. The company has reported 18% YoY growth in sales while its net profits have grown 32% year on year. Here is our analysis of the results.

Performance summary
  • Standalone net sales grow by 18% YoY during 2QFY11. Growth aided by healthy growth in the sales of the engineering and construction (E&C) business as well as the machinery and industrial products (MIP) business. Company's order inflows grow by 11% YoY during the quarter. Order backlog at the end of September 2010 stood at Rs 1.15 trillion.
  • Operating margins expand by 0.1% YoY (to 10.1%) on the back of lower costs of construction material and lower subcontracting charges (both as a percentage of sales).
  • Excluding extraordinary items, net profits increase by 26% YoY on the back of a 70% increase in other income.


Financial performance snapshot (Standalone)
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Sales 78,662 92,608 17.7% 152,289 170,969 12.3%
Expenditure 70,829 83,251 17.5% 136,587 151,878 11.2%
Operating profit (EBDITA) 7,833 9,357 19.5% 15,702 19,090 21.6%
Operating profit margin (%) 10.0% 10.1%   10.3% 11.2%  
Other income 2,668 4,522 69.5% 5,345 7,136 33.5%
Interest 1,263 1,932 53.0% 2,358 3,365 42.7%
Depreciation 1,001 1,212 21.1% 1,939 2,354 21.4%
Extraordinary items 274 708   10,473 708  
Profit before tax 8,510 11,444 34.5% 27,223 21,217 -22.1%
Tax 2,707 3,794 40.2% 5,437 6,905 27.0%
Profit after tax/(loss) 5,804 7,650 31.8% 21,786 14,312 -34.3%
Net profit margin (%) 7.4% 8.3%   14.3% 8.4%  
No. of shares#       587.6 605.0  
Diluted earnings per share (Rs)*         56.1  
P/E ratio (x)*^         36.0  
* On a trailing 12-months basis     ^Excluding extraordinary items

What has driven performance in 2QFY11?
  • L&T grew its standalone sales by around 18% YoY during 2QFY11. The rise was on the back of a 17% YoY growth in the company's E&C division (84% of total sales during the quarter) as well as a 37% YoY growth in its MIP division. The latter was however on a depressed base as L&T had witnessed a 23% YoY fall in the sales of the MIP division during the same quarter last financial year. As for the company's electrical and electronics (E&E) business, revenues fell by 5% YoY during the quarter. This was a result of the acute competition in the domestic electrical sector well as the continued slowdown in the domestic market. Overall, the company witnessed an 11% YoY increase in its order inflows during the quarter. At the end of September 2010, the company had an order backlog of Rs 1.15 trillion.

    Segment-wise performance (Standalone)
    (Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
    Engineering & Construction            
    Revenue 68,578 80,150 16.9% 134,273 146,550 9.1%
    % share 84% 84%   85% 83%  
    EBIT margin 10.1% 11.2%   10.4% 11.7%  
    Electrical & Electronics            
    Revenue 7,077 6,724 -5.0% 12,850 14,175 10.3%
    % share 9% 7%   8% 8%  
    EBIT margin 15.0% 12.9%   13.5% 11.3%  
    Machinery & Industrial Products          
    Revenue 5,096 6,981 37.0% 9,465 12,463 31.7%
    % share 6% 7%   6% 7%  
    EBIT margin 18.2% 16.6%   19.9% 18.3%  
    Others            
    Revenue 921 1,596 73.2% 1,694 2,817 66.3%
    % share 1% 2%   1% 2%  
    EBIT margin 19.1% 10.8%   12.9% 18.0%  

  • L&T's overall operating margins expanded by 0.1% YoY during 2QFY11. This was on account of lower material costs as well as a sharp drop in sub-contracting charges during the quarter (both as percentage of sales). Based on segments, while the E&C segment recorded expansion in EBIT margins, there was a contraction in profitability of the MIP and the E&E businesses. The fall in the margins of the latter segment was on account of higher input costs coupled with the resistance of customers to absorb a price increase.

  • On the back of strong rise in other income and expansion in operating margins, L&T's bottomline grew by 26% YoY during 2QFY11 (excluding extraordinary items). The growth was however impacted by substantially higher interest and depreciation charges both of which grew at a much faster pace than sales. Extraordinary items during the quarter represent the reversal of the provisions made previously with regards to the company's investment in Satyam. The reversal has been made proportionate to the sale of a part of the company's holdings in Satyam during the quarter.

What to expect?
At the current price of Rs 2,020, the stock is trading at a multiple of 22.5 times our estimated FY13 consolidated earnings. The management remains optimistic about the company's prospects on account of the overall buoyancy in India's economy and its rapid GDP growth. However, it has also warned about the heightened state of competition in the capital goods industry from both global and local players. The recent inflationary environment is also a cause of worry and could show some volatility in the company's margins over shorter periods of time. We retain a cautious view on the stock on account of its high valuations (ResearchPro subscribers, kindly click here)

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