Against the backdrop of financial turmoil engulfing the globe, Indian engineering conglomerate Larsen and Toubro Ltd (L&T) seems to be cruising rather comfortably, thanks to its strong domestic order book, which is three times its current revenue and 26% higher as of end-June compared with a year ago.
Moreover, 90% of its book is in domestic turf, concentrated in growth sectors such as infrastructure, power and hydrocarbons, where its engineering prowess holds the key to revenue traction. Overseas orders are focused in the Middle East and Far East markets.
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For the June quarter, revenue grew by 21% over a year ago. Operating profit grew by 12%, but higher costs hit profitability across segments.
Profit (before interest and tax) margins took a beating of about 150-300 basis points (bps) across segments from the year-ago period. One basis point is one-hundredth of a percentage point.
Its lifeline engineering and construction segment margin dipped about 240 bps. Rise in staff costs (6,400 people were added) and salary revisions ate into margins, too. Besides, larger projects were not yet at the stage of revenue and margin recognition, which partly affected key segments’ profitability.
Predictably, rate hikes resulted in a 25% jump in interest expenses compared with a year ago. This is not worrisome as the company is not over-leveraged and has access to foreign exchange loans, which are benign at this point in time.
What is of concern is that rising interest rates could hit future order inflows, as 62% of the inflows are now from the private sector. If not cancellation, the market is seeing a deferral of new projects.
For the near term, analysts expect public sector spending to keep the home fires burning for L&T. “However, interest rate rise may slow down GDP (gross domestic product) growth rate, which in turn may impact L&T’s business growth after six to nine months,” says Dhirendra Tiwari, senior vice-president at Motilal Oswal Securities Ltd.
L&T’s management, however, has maintained its fiscal 2012 (FY12) guidance for 15% growth in order inflows and 25% growth in net sales compared with the previous year. Although the stock jumped 2% on good performance and stability in earnings, negative global cues led to its shares closing marginally lower.
Its current market price of Rs 1,630 apiece discounts FY13 earnings by about 15 times, implying reasonable valuations.
Graphic by Naveen Kumar Saini/Mint
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