Larsen & Toubro: Disappointing results

Even as the order inflow was healthy, analysts feel the company may fall a tad short of its new revenue growth guidance.

The share price of Larsen & Toubro (L&T), India’s largest engineering company, fell 6.85 per cent on Thursday after it announced disappointing standalone results for the quarter ended December 2009. While the company’s net profit halved to Rs 758.8 crore after adjusting for non-recurring items, the profit was actually up 15 per cent to Rs 696 crore, partly helped by lower interest costs.

The disappointment, analysts say, is the 5 per cent decline in the company’s comparable revenues to Rs 8,071 crore, which was on account of deferment of some orders in infrastructure and hydrocarbon sectors as well as execution impediments. Secondly, the company halved its revenue growth guidance for 2009-10 to 10 per cent, which again dampened sentiments.

L&T’s largest business segment, engineering and construction (E&C), was the main culprit as its revenues fell 8.7 per cent on account of execution bottlenecks and delays in projects. Increased orders from the power sector helped L&T’s order inflow rise 23 per cent to Rs 16,400 crore; however, orders from export markets declined.

Lower raw material (commodity) prices and operating efficiencies helped the E&C business report an increase of 120 basis points in profit margins to 13.4 per cent.

The company’s electrical & electronics (E&E) and machinery and industrial products (MIP) businesses, together accounting for 15 per cent of revenues, saw revenues grow 11 per cent on the back of an ongoing industrial recovery and higher demand for construction and mining equipment.

Notably, the MIP business reported a robust 650 basis points improvement in profit margins to 21.9 per cent, helped by better realisations and cost control.

So far, for the nine months ending December 2009, L&T’s standalone revenues were up 1 per cent whereas net profit rose18 per cent, partly helped by the 130 basis points improvement in operating profit margins to 12.4 per cent. Considering its nine-month performance and L&T’s revenue guidance of 10 per cent for 2009-10, it will have to clock a growth of 25-27 per cent (revenues of about Rs 13,000 crore in the fourth quarter to meet its guidance).

Analysts, however, expect the company to fall short of its guidance and estimate the full-year revenue growth at about 8 per cent and net profit growth at 8-10 per cent. Even if L&T achieves its new guidance, its move to cut revenue guidance for 2009-10 is likely to prompt analysts to lower their estimates for 2010-11.

The good part is that L&T’s order book showed an improvement and was up 32 per cent year-on-year for the nine months to Rs 91,100 crore — the company expects to close the year with an order book of over Rs 100,000 crore. At Rs 1,524.35, analysts believe the stock is marginally expensive considering that it is trading at a price to earnings P/E of about 25 times and 20 times its estimated 2009-10 and 2010-11 earnings, respectively.