L&T: Margins not delivered

THE COMPASS

The firm hasn’t been able to sustain the operating profit margin.

The Larsen & Toubro (L&T) stock crashed nearly 11 per cent post the announcement of the September 2008 quarter numbers. The Street was disappointed at the 40 basis point fall in the engineering major’s operating margins compared with the September 2007 quarter.

The growth in the stand-alone revenues of 40 per cent at Rs 7,686 crore was in line with expectations — in the June quarter, revenues had risen 67 per cent. However, it wasn’t the same with the increase in the net profit which didn’t quite match up. The rise in the net profit was 32 per cent at Rs 460 crore; in the June quarter, the net profit had risen 33 per cent.

The management has clarified that operating margins for the key engineering and construction segment—which brings in over 80 per cent of revenues, have been stable at 11.5 per cent compared with the previous quarter.

It has also pointed out that the margins have come off because of start-up costs incurred for new businesses such as shipbuilding and also expenses on employees have been higher. The company believes it should be able to maintain operating profit margins achieved in FY08, which were around 11.5 per cent.

The higher expenses on interest have been incurred because the company has made some additional borrowing and also because it has swapped its foreign currency borrowings into rupee loans. Meanwhile, the firm’s order book remains strong with inflows in the September quarter up 74 per cent at Rs 12,415 crore.

Orders have been particularly strong for the engineering division where they have grown by 80 per cent and the management says these should be as profitable as the previous lot. L&T should end the current year with stand-alone revenues in the region of Rs 33,000—34,000 crore and a net profit of around Rs 26,50-Rs 2700 crore. That means earnings in FY09 would increase by about 22-24 per cent over FY08.