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L&T: Margins come in lower
Nov 10, 2014

Larsen & Toubro (L&T) has announced the second quarter results of financial year 2014-2015 (2QFY15). The company has reported 11% YoY growth in sales while net profits have grown 7% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated net sales for the company grew by 11% YoY during 2QFY15.
  • Operating expenses for the company increased by 13% YoY. This faster pace of growth in operating expenses caused a decline in margins. Overall, operating profit fell by 7% YoY in 2QFY15. As a result, operating margin contracted to 11% in 2QFY15 from 13.1% in the corresponding quarter of last year.
  • Net profit grew by 7% YoY during the quarter due to a dull performance at the operating level. A lowering of effective tax rates during the period helped the company post a growth in bottomline.

(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Sales 191,308 211,594 10.6% 363,719 401,341 10.3%
Expenditure 166,274 188,252 13.2% 319,957 352,847 10.3%
Operating profit (EBDITA) 25,034 23,342 -6.8% 43,762 48,495 10.8%
Operating profit margin (%) 13.1% 11.0%   12.0% 12.1%  
Other income 2,530 2,145 -15.2% 5,166 4,916 -4.8%
Interest 7,737 6,904 -10.8% 14,844 14,691 -1.0%
Depreciation 5,873 5,486 -6.6% 11,440 13,559 18.5%
Exceptional items      -   2,493 -
Profit before tax 13,954 13,097 -6.1% 22,643 27,653 22.1%
Tax 5,988 4,692 -21.6% 10,708 9,182 -14.3%
Extraordinary items, net of tax   (66) -   (66) -  
Profit after tax/(loss) 7,900 8,406 6.4% 11,870 18,472 55.6%
Net profit margin (%) 4.1% 4.0%   3.3% 4.6%  
Share in profit of associates 31 7   48 22  
Minority interest (132) (205)   (732) 208  
Profit after share of associates & minority interest 8,064 8,618 6.9% 12,649 18,286 44.6%
No. of shares         927.7  
Basic reported earnings per share (Rs)*         58.9  
P/E ratio (x)*         27.4  
* On a trailing twelve month basis

What has driven performance in 2QFY15?

  • The company secured orders worth Rs 398 bn during the quarter, which is a 17% YoY increase over the previous financial year's quarter. Of this, international orders comprised 17% of the inflows. The infrastructure, power and hydrocarbon segments drove the inflows by securing major orders this quarter.

  • The company's consolidated order book stood at Rs 2144.3 bn as at the end of the quarter, an increase of 14% YoY, of which international orders comprised 27%.

  • The infrastructure segment led the decline in margins during the quarter. The reason for this was that a larger percentage of the revenue accrued during the period was from jobs at an early stage of execution, and yet to achieve the margin recognition threshold. The power segment saw a decline in revenues due to a low opening order book and the majority of the newly secured orders being in the initial stages of execution. Under the developmental projects segment, the company commissioned the second unit of its Rajpura power plant which drove the substantial increase in this segment's revenues.

    Segment-wise performance (Consolidated)
    (Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
    Infrastructure
    Revenue 77,829 98,414 26.4% 141,662 173,622 22.6%
    % share 40% 45%   38% 42%  
    EBIT margin 10.7% 8.4%   9.6% 8.2%  
    Power
    Revenue 14,434 11,656 -19.3% 29,411 21,658 -26.4%
    % share 7% 5%   8% 5%  
    EBIT margin 29.7% 9.7%   23.3% 11.8%  
    Metallurgical and Material Handling
    Revenue 11,735 8,019 -31.7% 22,971 17,426 -24.1%
    % share 6% 4%   6% 4%  
    EBIT margin 13.7% 6.1%   13.1% 8.0%  
    Heavy Engineering
    Revenue 10,421 8,598 -17.5% 19,376 17,223 -11.1%
    % share 5% 4%   5% 4%  
    EBIT margin 9.8% 8.9%   7.1% 6.1%  
    Electrical & Automation
    Revenue 12,293 13,006 5.8% 22,412 23,549 5.1%
    % share 6% 6%   6% 6%  
    EBIT margin 8.4% 9.6%   8.4% 7.5%  
    Hydrocarbon
    Revenue 23,695 18,319 -22.7% 54,441 33,892 -37.7%
    % share 12% 8%   14% 8%  
    EBIT margin 6.6% -3.0%   5.2% -29.4%  
    IT & Technology Services
    Revenue 16,334 18,769 14.9% 30,706 36,278 18.1%
    % share 8% 9%   8% 9%  
    EBIT margin 20.0% 15.4%   21.4% 16.1%  
    Financial Services
    Revenue 12,665 16,056 26.8% 24,571 30,882 25.7%
    % share 6% 7%   7% 7%  
    EBIT margin 13.3% 14.2%   13.3% 18.4%  
    Developmental Projects
    Revenue   2,814 9,878 251.1%   5,595 31,358 460.4%
    % share 1% 5%   1% 8%  
    EBIT margin 2.0% 8.8%   -4.2% 42.0%  
    Others
    Revenue 14,412 15,536 7.8% 24,944 28,895 15.8%
    % share 7% 7%   7% 7%  
    EBIT margin 2.7% 14.4%   -0.4% 14.3%  
    Total Revenue* 196,631 218,250 11.0% 376,089 414,783 10.3%
    * Excluding inter-segment adjustments & excise duty
What to expect?

For a large projects oriented company like L&T, a majority of its segments do not see sales and margins accrue uniformly over the year. Hence the operational performance of various segments can be better judged only on the basis full year figures as the figures during any given quarter may not be representative of any longer term trend.

The management has indicated that domestic business sentiment has in fact seen an improvement on the back of high expectations from the new government as far as reviving growth momentum is concerned. An improvement in various macroeconomic factors too are encouraging investment interests in the country. The larger ticket size green field investments in core sectors however are expected to take a few more quarters to start flowing in.

At the current price of Rs 1,615, the stock trades at 19.8 times our FY17 earnings estimates for the company. Considering these expensive valuations, we maintain a SELL view on the stock at current levels.

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