L&T beats estimates on improved efficiency

Stock likely to be upgraded as margins inch up, double-digit revenue & order inflow growth forecast for FY15

Larsen & Toubro (L&T), the country’s largest engineering and construction company, has won back the Street’s confidence, with its robust execution and diversification into other regions. For the past few quarters, even though it has shown it can drive growth in a difficult environment without compromising on profitability, the Street has remained sceptical.

With the company giving an optimistic forecast for FY15, the Street is expected to upgrade the stock. Analysts believe even before earnings upgrades happen, the stock’s target price for FY15 is expected to be hiked. The company’s forecast of 20 per cent order inflow and 15 per cent revenue growth in FY15 has given the Street further confidence.

The March quarter numbers are reason enough to upgrade the company’s FY15 earnings, as the new government is expected to remove bottlenecks from stuck projects, which will benefit L&T. In FY14, sales grew 10 per cent year-on-year (y-o-y) to Rs 57,164 crore. International revenues account for 16 per cent of total sales and grew 22 per cent during the financial year. In the March quarter, revenues grew 11 per cent to Rs 20,229 crore. The company also managed to grow fresh orders by 15 per cent (Rs 94,108 crore) during the year, as it had expected. International orders have grown three times on a y-o-y basis, a third of the total order inflows.

The company also surprised with operating margins at 14.4 per cent, against the Street’s estimated 11.5 per cent. Higher margins helped expand operating income by 36 per cent y-o-y to Rs 2,900 crore. Margins at the segment level improved. The earnings before interest & tax for the engineering and construction segment improved 150 basis points (bps) y-o-y to 13 per cent. The power segment saw margins rise 800 bps y-o-y as some major projects saw completion.

The upward trajectory in margin was also driven by operating efficiency and robust execution, say analysts. Consequently, the company’s managed to beat the Street's profit estimates by a long shot. Even after adjusting the exceptional gain (insurance claim) of Rs 484 crore, L&T’s adjusted post-tax profit of Rs 2,239 crore during the March quarter is well ahead of the Street’s estimates. Sanjeev Zarbade, vice-president, private client group research, Kotak Securities, says: “Overall, a great set of numbers and we remain positive on the stock.”