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L&T: Slowdown in order inflows
Oct 24, 2011

Larsen & Toubro (L&T) has announced the second quarter results of financial year 2011-2012 (2QFY12). The company has reported 19.3% YoY and 4.4% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone net sales grow by 19.3% YoY during 2QFY12.
  • Operating profits increase 17.2% YoY in 2QFY12. However, operating margins decline 20 bps to 10.4% during the quarter.
  • Net profits increase by 4.4% YoY during the quarter.
  • The company registered an order inflow of Rs 160.9 bn during the quarter taking the order book to Rs 1,421.8 bn as of 2QFY12.


Financial performance snapshot (Standalone)
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Sales 94,222 112,452 19.3% 172,533 207,279 20.1%
Expenditure 84,205 100,712 19.6% 152,376 184,313 21.0%
Operating profit (EBDITA) 10,017 11,741 17.2% 20,157 22,966 13.9%
Operating profit margin (%) 10.6% 10.4%   11.7% 11.1%  
Other income 3,801 3,632 -4.4% 5,957 6,593 10.7%
Interest 1,870 1,970 5.4% 3,252 3,543 9.0%
Depreciation 1,212 1,709 41.0% 2,354 3,388 43.9%
Profit before tax 10,735 11,693 8.9% 20,508 22,629 10.3%
Tax 3,794 3,709 -2.2% 6,905 7,183 4.0%
Extraordinary items, net of tax   708 -   708    
Profit after tax/(loss) 7,650 7,984 4.4% 14,312 15,445 7.9%
Net profit margin (%) 8.1% 7.1%   8.3% 7.5%  
No. of shares         611.2  
Basic reported earnings per share (Rs)*         25.3  
P/E ratio (x)*         19.8  
* On a trailing 12-months basis

What has driven performance in 2QFY12?
  • L&T grew its standalone sales by around 19.3% YoY during 2QFY12. This was on the back of a 19.9% YoY growth in the company's Engineering & Construction (E&C) division, well supported by 26.2% YoY growth in the Electrical and Electronics (E&E) division. However, revenues from the Machinery & Industrial products (M&I) division declined 3.1% YoY. Revenues from the E&E segment increased sharply due to better product mix. However, segmental margins declined from 12.9% in 2QFY11 to 8.4% in 2QFY12 due to intensifying competition and higher input cost. Revenues from the M&I division registered a decline due to a general slowdown in industrial and mining activities.

    Segment-wise performance (Standalone)
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Engineering & Construction
    Revenue 81,047 97,213 19.9%    147,007 178,207 21.2%
    % share 84% 85%   83% 84%  
    EBIT margin 11.0% 10.6%   11.6% 10.3%  
    Electrical &Electronics
    Revenue 6,716 8,474 26.2% 14,137 15,936 12.7%
    % share 7% 7%   8% 8%  
    EBIT margin 12.9% 8.4%   11.4% 8.4%  
    Machinery &Industrial Products
    Revenue 6,996 6,780 -3.1% 12,463 13,684 9.8%
    % share 7% 6%   7% 6%  
    EBIT margin 16.5% 15.7%   18.3% 16.7%  
    Others
    Revenue 1,609 2,221 38.0% 2,810 4,211 49.8%
    % share 2% 2%   2% 2%  
    EBIT margin 10.7% 21.5%   18.0% 21.4%  
    Total*
    Revenue 96,367 114,688 19.0% 176,417 212,038 20.2%
    * Excluding inter-segment adjustments & excise duty

  • L&T's operating margins declined marginally by 20 bps during the quarter. Operating expenditure increased due to increase in staff cost. Addition of manpower and wage revisions saw staff cost rise from 8.8% in 2QFY11 to 9.8% in 2QFY12. However, SG&A expenses declined from 5.9% in 2QFY11 to 5.2% in 2QFY12 due to better expense curtailment measures undertaken by the company.

  • Overall, the company garnered fresh orders to the tune of Rs 160.9 bn, a decline of 21% YoY during the quarter. Continued order deferrals due to challenging macro environment led to a decline in order inflows. At the end of September 2011, L&T had an order backlog of Rs 1.42 trillion. Major orders came from buildings and factories, hydrocarbon and power transmission & distribution sectors.

  • L&T's profits grew by 4.4% YoY during 2QFY12. Fall in other income and increase in depreciation expenses impacted profitability growth. Depreciation expenses increased due to higher asset base. However, after adjusting for the extraordinary gains, net profits increased 15.0% YoY.

What to expect?
Taking into consideration the current weak macro-environment, management has lowered the order inflow guidance for the current fiscal. Management now expects the order inflows to increase by 5% YoY against the earlier growth guidance of 15% YoY. In addition, management has also indicated further margin erosion in E&C segment due to raw material price inflation. Even the working capital cycle has increased due to continuing extended support to the vendors. We believe the next two-three quarters would be really challenging for the company. While order inflow guidance has been lowered, even the margin profile is at risk due to rising input cost. In light of these factors, we maintain our "HOLD" view on the stock.

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