Slowing economy takes toll on L&T profit

L&T posts 12.5% decline in first-quarter net profit; shares fall the most in more than four years
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First Published: Mon, Jul 22 2013. 02 23 PM IST
After missing profit and sales forecasts in the three months ended March, L&T said in May that it would chase more overseas orders to shield itself against challenges in the domestic market. Photo: Priyanka Parashar/Mint
After missing profit and sales forecasts in the three months ended March, L&T said in May that it would chase more overseas orders to shield itself against challenges in the domestic market. Photo: Priyanka Parashar/Mint
Updated: Tue, Jul 23 2013. 12 54 AM IST
Mumbai: India’s biggest engineering and construction company Larsen and Toubro Ltd (L&T) on Monday reported a 12.5% decline in fiscal first-quarter net profit because of shrinking margins and lower income from sources other than its core operations in the face of slower economic growth. L&T shares fell the most in more than four years after it missed analyst estimates.
Net profit fell to Rs.756.03 crore in the three months ended 30 June from Rs.863.65 crore a year ago, the company said. Net sales rose 5% to Rs.12,555.06 crore. L&T had been expected to post a net profit of Rs.915.9 crore and net sales of Rs.13,471.5 crore in the quarter, according to a survey of analysts by Bloomberg.
L&T stock fell 7.46% to close at Rs.901.95 on the BSE on a day the benchmark Sensex inched up 0.05% to end at 20,159.12 points and the BSE Capital Goods Index lost 5.57% to 8,801.26 points. This is the stock’s biggest drop since July 2009.
L&T’s June quarter operating margin narrowed to 8.5% from 9.1% a year earlier. The company added orders worth Rs.25,159 crore in the June quarter, taking its order book to Rs.1.65 trillion, up 8% from a year earlier. Overseas orders rose 16% and accounted for 12% of total orders.
India’s slowing economic growth and high borrowing costs have taken their toll on infrastructure projects, many of which have been stalled by delays in securing regulatory approvals and completing land acquisition. Economic growth slowed to 5% in the year ended 31 March, the slowest in a decade.
Last week, South Korean steel maker Posco gave up its plans to build a $5 billion steel plant in Karnataka while ArcelorMittal pulled the plug on plans to build a steel plant in Orissa.
Volatility in the Indian rupee, which declined 8.6% against the dollar last quarter, and uncertainty in the financial markets is affecting investment sentiment, L&T chairman A.M. Naik said in a company statement.
So-called other income, or income from sources other than its core business, fell by 22.3% to Rs.472.6 crore from a year ago. The drop is largely on account of lower dividend receipts as well as lower interest earnings, said R. Shankar Raman, chief financial officer.
“Opportunities are indeed limited and there is competitive pressure. I don’t think that you will see margin levels that we reported in 2007, 2008 or 2009 being reflected in these quarters that we are living through currently,” he said.
L&T expects sales growth to accelerate in the second half as demand for energy exploration and construction projects revives. That will help it achieve its revenue and order growth forecast of 15-20% for the year, Raman said.
L&T’s latest quarterly numbers were disappointing and mirrored a poor operating performance as well as project execution, said Viral Shah, senior research analyst (infrastructure) at domestic brokerage Angel Broking Pvt. Ltd.
Still, L&T is best placed to benefit from a gradual recovery in the capital expenditure cycle, given its diverse exposure to sectors of the economy, a strong balance sheet and cash flow generation, Shah said.
“Notwithstanding, the disappointing numbers, on a long-term basis, we continue to be positive on the company,” said Sanjeev Zarbade, vice president, private client group research, at domestic brokerage Kotak Securities Ltd.
L&T said it will continue to focus on countries in West Asia, some markets in the erstwhile Soviet Union, Africa and South Asia.
After missing profit and sales forecasts in the preceding March quarter, L&T had said in May that it would chase more overseas orders to shield itself against challenges in the domestic market.
Raman said L&T had completed restructuring its internal businesses by dividing the operations into 11 segments.
The engineering and construction segment (E&C) has been broken up into infrastructure, hydrocarbon, power, metallurgical and material handling, heavy engineering, electrical and automation, machinery and industrial products and others segment. The remaining three segments are realty, infotech and concessions.
“E&C is getting to be very large and is not easy to manage, so we have created different teams because the management bandwidth has to be reorganized to ensure that we grow better,” Raman said.
Bloomberg contributed to this story.
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First Published: Mon, Jul 22 2013. 02 23 PM IST
More Topics: Larsen and Toubro | L&T | profit | shares | sales |
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