Great Comedown

Sluggish growth in the capital goods industry and a drop in realisations in the cement business dragged down Larsen & Toubro's bottomline for 1999-2000.

L&T has reported a 27 per cent drop in net profit to Rs 342 crore for the year, while its turnover growth was flat, increasing by a little over two per cent to Rs 7,424 core.

The drop in net profit is all the more stark considering that other income increased 59.09 per cent to Rs 175 crore. With the prop of other income, the fall would have been sharper.

The notes to account suggest that the company changed its valuation policy with the result that inventory was valued higher at the year end. The company has put the increase in valuation at Rs 87.75 crore, and the impact on net profit at Rs 54 crore.

 

The other income includes an entry of Rs 51.61 crore being gains arising from the extinction of certain loans. Analysts suggest that this represents a sales tax liability transferred to its subsidiary, L&T Finance.

Adjusting for these entries, the net profit comes to around Rs 236 crore which is a straight 50 per cent drop over last year's net profit figure of Rs 470.74 crore. The reported earnings per share of Rs 13.74 would drop to Rs 9.49 after making these adjustments.

L&T's engineering and construction division contributes around 59 per cent to its turnover, the cement business accounts for 26 per cent and the electronics division contributes seven per cent.

L&T's operating profit margins improved marginally from 10.44 per cent to 11.05 per cent in the current year. Analysts attribute this to higher cement production and increased internal power consumption by the company. The latter accounts for L&T's order book position is expected to improve in the current year as substantial order inflows from the refinery sector are expected. Of the total investment of Rs 8,000 in the refinery sector, investment worth Rs 3,000 crore is expected to come in the current year.

The markets have taken a very dim view of the company's results and worse, its attempts at window dressing its accounts. For a company that was at the forefront of corporate governance, this is indeed a great comedown.

The L&T stock Monday plummeted 12 per cent to a 52-week low of Rs 183.95, with analysts doubting whether this level is sustainable. At an adjusted EPS of Rs 9.49, the stock trades at a price earnings of around 22 which is still too high.

Infosys was able to post a scorching rate of profit growth last fiscal due to curtailing operating expenses

The crucial question about the ICE stocks at their current beaten down prices is whether these stocks are good value at these prices. Some clues are available from the Infosys annual report. The report points out that PE/EPS growth was a stratospheric 1.80, compared to 0.61 in 1998-99 and 0.64 in 1997-98.

Taking Infosys' current price at Rs 7,000, the historical price-earnings ratio works out to 161.9, taking the earnings per share for 1999-2000 excluding extraordinary income. That would put the PE/EPS growth ratio, so beloved of analysts, at 1.4, considering that EPS growth was 115.07 per cent in the last fiscal. That's still far higher than what this ratio was in 1998 and 1997.

Is that because Infosys is getting better all the time? Well, EPS growth was actually higher in 1998-99, at 120.15 per cent. Consider some of the other ratios. Operating profit growth was 115.14 per cent in 1999-2000, compared to 120.19 per cent in the previous year. Growth in total revenue was 73.85 per cent in 1999-2000, as against 96.93 per cent in 1998-99 and 81.05 per cent in 1997-98. Infosys was able to post a scorching rate of profit growth last fiscal due to curtailing operating expenses. That's why the EBITDA/total revenue ratio increased smartly during 1999-2000.

Also, consider the important Return on Capital Employed ratio, (PBIT/Average Capital employed) which fell dramatically to 46.27 per cent, compared to 63.51 per cent in 1998-99. Technology investment/total revenue fell to 5.86 per cent from 8.55 per cent in 1998-99.

Return on average net worth fell to 41 per cent against 54 per cent during the previous year. The company says this was due to having around 61 per cent of its assets in liquid funds. As on March 31, 2000, cash and bank balances amounted to Rs 431.79 crore. A year earlier, this figure stood at Rs 405.04 crore. Total shareholders' funds amounted to Rs 833.30 crore. The management says that the huge amounts in overseas balances are held to meet project-related expenditure overseas.

The point is, the markets know fully well the value of this cash hoard, especially at a time when equity valuations are depressed. It is these future acquisitions which the market expects will propel Infosys' growth, which is why the PEG ratio continue to be high.