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L&T: Margins disappoint

Oct 29, 2002

L&T, the EPC and cement major, has announced encouraging September quarter results, reporting an 18% growth in topline and a 4% bottomline growth. Operating margins have however come under pressure (down 220 basis points to 6%).

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Net Sales 17,758 20,940 17.9% 36,068 42,062 16.6%
Other Income 693 515 -25.7% 1,150 977 -15.0%
Expenditure 16,308 19,691 20.7% 32,464 39,249 20.9%
Operating Profit (EBDIT) 1,450 1,249 -13.9% 3,604 2,813 -21.9%
Operating Profit Margin (%) 8.2% 6.0%   10.0% 6.7%  
Interest 902 535 -40.7% 1,844 1,129 -38.8%
Depreciation 818 773 -5.5% 1,635 1,554 -5.0%
Profit before Tax 424 457 7.8% 1,275 1,108 -13.1%
Extraordinary items - -   - -  
Tax (19) (35) 81.3% (220) (240) 9.1%
Profit after Tax/(Loss) 405 422 4.3% 1,055 868 -17.8%
Net profit margin (%) 2.3% 2.0%   2.9% 2.1%  
No. of Shares 249.0 249.0   249.0 249.0  
Diluted Earnings per share* 6.5 6.8   8.5 7.0  
P/E Ratio   27.7     27.0  
(* annualised)            

As apparent from the topline growth, the company has recorded strong growth in both its EPC and cement business. A healthy topline growth can be partly attributed to a significant jump in export revenues. For the September quarter export revenues have gone up by 158%. L&T's exports thrust for both its EPC as well as cement divisions seems to be paying off. L&T's cement sales volumes grew by 12% while realisations have declined by nearly 16% on a YoY basis. This has severely impacted the operating margins. Also operating margins of export revenues of the EPC division may be lower than domestic revenues. This may have put further pressure on consolidated margins.

Operating expenses of the company have risen by nearly 21% in the September quarter. A 268% and 25% rise in the construction material and employee costs respectively has considerably increased operating expenses. Employee costs have gone up mainly on account of additional VRS and retirement benefit provisioning. L&T has been able to significantly pare down its interest expenses by retiring and/or restructuring high cost debt. Lower interest expenses have been the main contributor to the bottomline improvement.

The stock is currently trading at Rs 188 at a P/E of 28x its annualised 2QFY03 earnings. EPC business of the company has been the star performer in the current year. Higher exposure to international markets is likely to help maintain a healthy orderbook, albeit at the cost of margins as international markets are highly competitive. Operating margins are also likely to remain subdued due to pressure on cement realisations. Performance of the cement division is likely to remain lacklustre until realisations improve.

The stock has been range bound in the recent past owing to Grasim's open offer (at Rs 190 per share) for L&T's 20% stake. Grasim's interest in L&T has raised the uncertainty over the future vision of the latter. This uncertainty is likely to reflect on its stock price in the short term. Its long term performance however, depends on who gains management control over the company and post that, what are the management's restructuring plans.


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