Larsen & Toubro: Margin surprise

L&T’s future looks better with the economy showing signs of revival, higher infrastructure spending and firm crude oil prices.

Larsen & Toubro’s (L&T) September 2009 quarter performance was a mixed bag and short of expectations. The stock was down 3.9 per cent, much more than the 1.3 per cent decline in the Sensex. Revenues grew by a mere 3 per cent to Rs 7,919 crore, lower than Rs 8,300-8,900 crore estimated by analysts. But, adjusting for the sale of its ready-mix concrete business, revenues were up 6 per cent.

While net profits (excluding exceptional items of Rs 12 crore) were up 24 per cent at Rs 568 crore and within estimated range of Rs 550-630 crore, it was boosted by a strong 64 per cent rise in other income at Rs 218 crore. Higher treasury, interest and dividend income and Rs 86 crore worth of export incentive arrears boosted other income. In the core businesses, subdued demand in the global and domestic markets impacted the performance of its electrical & electronics (E&E) and machinery & industrial products businesses leading to lower revenues year-on-year. However, since the last two quarters of 2008-09 were not good, these businesses should see better numbers in the second half of the current fiscal.

The biggest revenue contributor, the engineering and construction division (E&C) benefited from strong growth in export revenues (up 32 per cent), helped by relatively higher order inflows last year. But, with delay in project awarding in the domestic business last year, revenues were up just 7 per cent. Positively, lower commodity prices and better product mix in E&E business boosted EBIDTA margins by 400 basis points year-on-year to 17.1 per cent -- overall EBIDTA margins were hence, higher by 140 basis points to 10.6 per cent (more than estimates of 9.6-10.4 per cent).

L&T secured some big projects in the hydrocarbon and power sectors during the quarter, pushing up its new order inflow by 47 per cent year-on-year to Rs 18,365 crore ---almost double the orders received in the June quarter. Thus, its order book rose by 30 per cent to Rs 81,623 crore, which is 2.3 times L&T’s previous 12 months revenues and indicates healthy visibility. With the Indian economy showing signs of improvement, spending on infrastructure to remain healthy and firm crude oil prices, the company’s management believes that the outlook is better -- order book growth likely to sustain at 30 per cent, margins to hold at current levels and revenue seen growing by about 15 per cent. At Rs 1,608.50 though, the stock trades at a PE 25 times its estimated 2009-10 EPS and looks fairly valued.