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L&T: Strong momentum - Views on News from Equitymaster
 
 
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  • Oct 25, 2004

    L&T: Strong momentum

    Performance summary
    Engineering major, L&T, continued its buoyant performance in September quarter. The company reported 44% revenue and 358% bottomline growth during the quarter. However, bottomline growth was propped up by significant extraordinary income. Operating margins continue to improve as compared to corresponding period last year.

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net Sales 20,573 29,643 44.1% 36,608 56,040 53.1%
    Expenditure 20,527 28,664 39.6% 36,177 54,225 49.9%
    Operating Profit (EBDITA) 46 980 2029.3% 431 1,816 321.2%
    EBDITA margin (%) 0.2% 3.3%   1.2% 3.2%  
    Other income 1,347 720 -46.5% 2,029 1,253 -38.2%
    Interest (net) 48 134 180.7% 137 233 70.3%
    Depreciation 215 220 2.3% 429 428 -0.4%
    Share of profit from integrated JVs (net of tax) 56 22 -61.0% 196 120 -38.8%
    Profit before Tax 1,186 1,368 15.3% 2,089 2,528 21.0%
    Extraordinary income/(expense) 0 3,620 - 0 3,620 -
    Tax 373 1,268 239.6% 641 1,627 153.6%
    Profit after Tax 813 3,720 357.8% 1,448 4,521 212.3%
    Net profit margin (%) 3.9% 12.5%   4.0% 8.1%  
    No. of Shares (m) 124.3 124.4   124.3 124.4  
    Diluted Earnings per share (Rs)* 26.1 119.6   23.3 72.7  
    P/E ratio (x)         11.4  
    P/E ratio (excluding extraordinary income) (x)         29.5  
    (* annualised)            

    What is the company’s business?
    Larsen & Toubro (L&T) is the largest engineering, procurement and construction (EPC) company in India. Until recently, the company was also the second largest producer of cement in India with an installed capacity base of 16.5 million tonnes. However, this business has now been acquired by Grasim and is now known as Ultratech CemCo. L&T has divided its current operations in two major divisions viz. engineering and construction (E&C) and electricals and electronics (E&E).

    What has driven performance in 1QFY05?
    Strong order backlog:  The E&C business witnessed 48% growth during the quarter. The order backlog of this division stood at Rs 164 bn at the end of the quarter, which is almost 2 times FY04 E&C revenues. However, new order bookings during the quarter amounted to Rs 24.6 bn, which is a 23% decline as compared to the same period last year. As per the company's release 'delayed decisions on capex programs in the core sector and infrastructure sectors and the changes in policy environment have resulted in fewer domestic opportunities during the period under review'.

    Segmental snapshot
    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Engineering & Construction 17,308 25,599 47.9% 30,418 48,374 59.0%
    % of gross revenue 80.7% 83.4%   79.7% 83.5%  
    PBIT margin (%) 4.5% 3.3%   4.9% 4.2%  
    Electrical & Electronics 2,531 3,008 18.8% 4,559 5,517 21.0%
    % of gross revenue 11.8% 9.8%   12.0% 9.5%  
    PBIT margin (%) 10.2% 13.3%   8.9% 11.3%  
    Others 1,611 2,069 28.4% 3,166 4,040 27.6%
    % of gross revenue 7.5% 6.7%   8.3% 7.0%  
    PBIT margin (%) 8.8% 9.2%   5.5% 10.7%  
    Gross revenue 21,450 30,677 43.0% 38,142 57,930 51.9%
    Less: Inter-segment revenue 243 443 82.4% 444 604 35.9%
    Net revenue 21,208 30,234 42.6% 37,698 57,327 52.1%

    The E&E division revenues increased by 19% during the quarter. Apart from higher order backlog, the growth in revenues of this division is due to upturn in the investment cycle that industry has witnessed in the recent past. The company's switchgear standard products business has seen improvement in demand leading to higher offtake and realisations. Since this division also caters to T&D equipments (transmission and equipment) and automation products, the division is likely to keep the growth momentum in the medium term.

    Margin improvement:  Operating margins continued to improve during the quarter, led by better PBIT margins posted by the E&E division. As can be seen from the table above, the E&E division has seen almost 3% improvement in PBIT margins. This is due to lower manufacturing costs and higher contribution from new products. The margins of the E&C division were lower during the quarter. However, this is not a true representation, as margins in this business do not accrue uniformly during the year. Hence, the financial performance of the segment can be discerned only on the basis of figures for the full year. Just to put things in perspective, the E&C business earned a PBIT margin of 7.4% in FY04, more than double of what it has recorded in 2QFY05 (3.3%).

    Extra-ordinary income props PAT:  Though the company has reported a significant growth in net profits, most of this growth has to be attributed to a one time extraordinary gain of Rs 3.5 bn on sale of 10.6 m shares of Ultra Tech CemCo Limited (representing 8.5% of the company’s share capital) to Grasim Industries and its subsidiary. L&T also earned Rs 87 m as a consideration for sale of the marketing rights of Earthmoving Equipment products to L&T-Case Equipment Private Limited, an associate of the company. Excluding both these non-recurring incomes, the company has infact reported only 15% growth at the profit before tax level. Lower other income (down 47%), higher interest burden and decline in income from other joint ventures (61%) were largely responsible for this subdued growth in profits.

    What to expect?
    The company has declared a special one time dividend of Rs 10 per share (Record date: November 2, 2004). At the current price level of Rs 830, the stock trades at almost 30 times annualised 1HFY05 earnings (excluding the extraordinary income). The company is reasonably confident that E&C order booking would pick up in the second-half of the year. E&C revenues for the year are expected to show an increase of around 30% YoY. Operating margin for the second half of the year is expected to be significantly higher than the first half. Going by the guidance, the stock trades at market cap to sales ratio of almost 1 time expected FY05 revenues, and around 15.5 times FY05 expected earnings. In our view, L&T will continue to be one of the key beneficiaries of the continued focus on infrastructure development.

     

     

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