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L&T: Exceptional gains boost's profits
Oct 22, 2012

Larsen & Toubro (L&T) has announced the second quarter results of financial year 2012-2013 (2QFY13). The company has reported 17.4% YoY and 42.4% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone net sales grow by 17.4% YoY during 2QFY13. Revenue growth was driven by 19.1% YoY growth in the Engineering & Construction (E&C) business.
  • Operating profits increase 15.5% YoY in 2QFY13. However, operating margins decline 10 bps to 10.7% during the quarter.
  • Net profits increase by 42.4% YoY during the quarter. However, after adjusting for exceptional and extraordinary items the recurring profits grew by 9.0% YoY. The exceptional item pertains to gain on sale in a subsidiary company.
  • The company registered an order inflow of Rs 209.6 bn during the quarter, a growth of 30% YoY. The total order book at the end of the quarter stood at Rs 1,585.2 bn.
  • The company allotted 1 m equity shares during the quarter on account of exercise of stock options by its employees.
  • The standalone long term debt to equity ratio of the company stood at 0.44x as at 30th September 2012.

Financial performance snapshot (Standalone)
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Sales 112,442 131,952 17.4% 207,263 251,506 21.3%
Expenditure 100,276 117,899 17.6% 183,613 226,682 23.5%
Operating profit (EBDITA) 12,165 14,054 15.5% 23,649 24,824 5.0%
Operating profit margin (%) 10.8% 10.7%   11.4% 9.9%  
Other income 3,201 3,294 2.9% 6,898 9,352 35.6%
Interest 1,970 2,350 19.3% 3,543 4,634 30.8%
Depreciation 1,709 2,040 19.3% 3,388 3,959 16.9%
Exceptional items - 2,143     1,760  
Profit before tax 11,687 15,101 29.2% 22,617 27,442 21.3%
Tax 3,703 4,257 14.9% 7,171 7,962 11.0%
Extraordinary items, net of tax - 529     529  
Profit after tax/(loss) 7,984 11,373 42.4% 15,446 20,010 29.5%
Net profit margin (%) 7.1% 8.6%   7.5% 8.0%  
No. of shares         613.8  
Basic reported earnings per share (Rs)*         32.6  
P/E ratio (x)*         20.8  
* On a trailing 12-months basis

What has driven performance in 2QFY13?
  • L&T grew its standalone sales by around 17.4% YoY during 2QFY13. This was on the back of a 19.1% YoY growth in the company's Engineering & Construction (E&C) division. However, revenues from the Machinery & Industrial products (M&I) division declined 8.8% YoY. Nonetheless, revenues from the Electrical and Electronics (E&E) division were flat at 3.8% YoY.

  • Healthy execution and strong order book resulted in 19.1% YoY revenue growth from the E&C division. The order inflow from the E&C segment increased 31% YoY with total inflow of fresh orders amounting to Rs 191.3 bn during the quarter. However, revenues from the E&E segment were relatively flat due to sluggish industrial offtake.

    Segmental-wise performance (Standalone)
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Engineering & Construction
    Revenue 97,941 116,691 19.1% 179,594 222,274 23.8%
    % share 85% 87%   85% 87%  
    EBIT margin 10.7% 10.8%   10.4% 10.1%  
    Electrical & Electronics
    Revenue 8,478 8,803 3.8% 15,940 16,406 2.9%
    % share 7% 7%   8% 6%  
    EBIT margin 8.4% 8.3%   8.4% 6.9%  
    Machinery & Industrial Products
    Revenue 6,037 5,508 -8.8% 12,278 10,575 -13.9%
    % share 5% 4%   6% 4%  
    EBIT margin 16.0% 12.6%   17.0% 13.0%  
    Others
    Revenue 2,221 3,320 49.5% 4,211 6,950 65.1%
    % share 2% 2%   2% 3%  
    EBIT margin 21.5% 20.5%   21.4% 24.8%  
    Total*
    Revenue 114,677 134,322 17.1% 212,023 256,205 20.8%

  • L&T's operating margins were relatively flat during the quarter. Operating expenditure increased 17.6% YoY due to increase in material cost and staff cost. However, selling, general & administrative expenses (SG&A) declined due to expense control and decline in marked to market forex losses.

  • L&T's profits grew by 42.4% YoY during 2QFY13. However, after adjusting for exceptional and extraordinary items the recurring profits grew by 9.0% YoY.

What to expect?
Despite execution issues prevailing in the sector, revenue growth posted by the E&C segment was highly commendable. Even the order inflow of Rs 191 bn, up 31% YoY was healthy. The growth in the order book predominantly came in from the transportation, urban and water infrastructure sectors. Due to overall diversity in the order book, the execution issues have not impacted the top line growth. While performance from the E&E segment was relatively modest, the future prospects appear bright due to steps being taken to enhance the product range and plans to relocate to low cost regions. However, the prospects of M&I division do not appear too exciting due to rising input costs, continued mining bans and sluggish industrial conditions.

Since our last recommendation in November 2011 the stock has already appreciated by approximately 35%. Our target on the stock is 2,100 from an FY15 perspective. So, from these levels the CAGR expectation is about 9-10%. As such, we advise investors to HOLD on the stock.

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