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L&T: Growth slows but margins improve

Oct 22, 2009

Performance summary
  • Standalone net sales grow by a measly 2.4% YoY during 2QFY10. Growth aided by a 13% YoY growth in sales of the engineering and construction business Ė companyís order book grows by 30% YoY during the quarter. Order backlog at the end of September 2009 stood at Rs 816 bn.
  • EBIDTA margins expand by 1.3% YoY on the back of lower costs of construction material and lower costs of traded goods and lower other expenses (all as percentage of sales).
  • Excluding extraordinary items, net profits increase by 20% YoY on the back of a 54% increase in other income.

Financial performance snapshot (Standalone)
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Sales 76,822 78,662 2.4% 145,836 152,289 4.4%
Expenditure 70,128 70,816 1.0% 132,198 136,580 3.3%
Operating profit (EBDITA) 6,694 7,846 17.2% 13,639 15,709 15.2%
Operating profit margin (%) 8.7% 10.0%   9.4% 10.3%  
Other income 1,757 2,702 53.8% 3,526 5,386 52.7%
Interest 813 1,310 61.1% 1,318 2,406 82.5%
Depreciation 731 1,001 37.0% 1,389 1,939 39.5%
Extraordinary items - 274   - 10,473  
Profit before tax 6,907 8,511 23.2% 14,458 27,223 88.3%
Tax 2,304 2,707 17.5% 4,831 5,437 12.6%
Profit after tax/(loss) 4,603 5,804 26.1% 9,627 21,786 126.3%
Net profit margin (%) 6.0% 7.4%   6.6% 14.3%  
No. of shares#       292.6 587.6  
Diluted earnings per share (Rs)*         49.0  
P/E ratio (x)*^         32.9  
* On a trailing 12-months basis;  ^Excluding extraordinary items;  # Adjusted for the 1:1 bonus issue

What has driven performance in 2QFY10?
  • L&T grew its standalone sales by around 2% YoY during 2QFY10. The growth would have been roughly 6% were it not for the RMC (ready mix concrete) business which contributed to sales in the comparable quarter last year but not this quarter as it was subsequently sold off. The growth was on the back of a 14% YoY growth in the companyís E&C division (84% of total sales during the quarter). Growth in this segment was tempered due to delays in clearances and financial closures in case of a few project orders in infrastructure sector. This division recorded an order inflow of Rs 170 bn during the quarter, which was a growth of about 63% YoY. At the end of September 2009, the segment had an order backlog of Rs 799 bn.

    As for the companyís electrical and electronics (E&E) business, sales fell by 7% YoY during the quarter. The segment profitability for the quarter witnessed improvement though, mainly due to lower input costs and a better product mix. The third business of Machinery & Industrial Products (MIP) recorded a drastic fall of 23% YoY during the quarter due to the depressed demand for industrial products and equipment. Though the company saw some recovery signs in the construction equipment business, margins remained under pressure due to intense competition and persistent demand of customers for higher discounts in prices.

    Segment-wise performance (Standalone)
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Engineering & Construction            
    Revenue 60,241 68,541 13.8% 116,001 134,270 15.7%
    % share 76.5% 83.9%   77.1% 84.8%  
    EBIT margin 10.8% 10.1%   10.3% 10.4%  
    Electrical & Electronics            
    Revenue 7,622 7,088 -7.0% 13,401 12,847 -4.1%
    % share 9.7% 8.7%   8.9% 8.1%  
    EBIT margin 11.3% 14.9%   11.5% 13.5%  
    Machinery & Industrial Products            
    Revenue 6,869 5,096 -25.8% 13,227 9,465 -28.4%
    % share 8.7% 6.2%   8.8% 6.0%  
    EBIT margin 20.1% 18.2%   21.6% 19.9%  
    Revenue 4,023 923 -77.1% 7,784 1,694 -78.2%
    % share 5.1% 1.1%   5.2% 1.1%  
    EBIT margin 5.5% 19.1%   6.0% 12.9%  

  • L&Tís overall operating margins expanded by 1.3% YoY during 2QFY10. This was on account of lower costs of construction material, lower costs of traded goods and lower other expenditure (all as percentage of sales). Based on segments, while the MIP segment recorded expansion in EBIT margins, there was a contraction in profitability of the E&C and the E&E business.

  • On the back of strong growth in other income and expansion in operating margins, L&Tís bottomline grew by 20% YoY during 2QFY09 (excluding extraordinary items). The growth was however impacted by a substantially higher interest and depreciation charges both of which grew at a much faster pace than sales.

  • L&Tís subsidiaries saw a mixed performance. While the IT subsidiary, L&T Infotech recorded topline and bottomline contraction during 1HFY09 due to the slowdown in the US and European markets, L&T Finance recorded a growth of 19% YoY and 33% YoY in its revenues and profits.

What to expect?
At the current price of Rs 1,610, the stock is trading at a multiple of 18.2 times our estimated FY12 consolidated earnings. As indicated by the management, the companyís recent fund raising though the FCCB issue and the QIP has been in line with its capital expenditure plans over the next few years. As far as its user industries go, the power sector is witnessing increasing investment interest from the private sector as is also evident from the IPOs from that space that have been hitting the market in recent times.

The hardening crude oil price in recent times augurs well for new opportunities in the hydrocarbon sector as also revival of infrastructure development in the Gulf region where L&T has a significant presence. The main reason for L&Tís poor topline performance has been combination of delay in project execution (especially of road projects), and a slowdown in off-take of products under the other two segments of E&E and MIP. These two business may continue their drag on the topline performance for the rest of FY10, unless a full blown recovery were to take capital investment levels to much higher levels. Though the E&C segment holds the potential to firm up things for the rest of the year, with hopes that the pace of project execution will be faster in the rest of the year.

However as exemplified by L&Tís performance so far in FY10, such execution issues always have the potential to crop up and can take a toll on the companyís performance despite a healthy backlog. Keeping the above factors in mind, the high valuation for the stock worries us.

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