Engineering and construction company Larsen and Toubro Ltd (L&T) has been reporting new order wins with unfailing regularity for several months now.
During the quarter ended December, the company saw a 37% rise in its order inflow compared with the year-ago period, which is even better than the 26% rise during the September quarter. The order book at the end of the December quarter was Rs50,000 crore—more than two years’ revenues.
The high revenue visibility, its ability to pick and choose its projects and its position at the cutting edge of the infrastructure boom have all helped L&T become a proxy for infrastructure growth in the country. That should help cushion the stock in the current downturn.
L&T’s results for the December quarter confirm the optimism. The momentum has been maintained, with gross sales and service revenues up 54% over the corresponding period of the previous fiscal year. Profit growth has been more muted, with net profit up 40%. That’s because operating margins were lower, at 10.8% versus 11.1% in the same quarter of the previous year.
The surprise is that margins have improved for all the large segments, including the dominant engineering and construction segment, which accounted for three-quarters of the revenue and 71% of the profit in the December quarter. It’s probably the unallocable expenditure that has led to a drop in the overall operating profit margin, and in any case the drop in margins is just 30 basis points.
Nevertheless, most of L&T’s contracts are on a fixed-price basis, so it’s possible that margins may, in the future, be affected by higher raw material prices. Analysts say the company is trying to increase manufacturing content to improve margins.
L&T is also entering new businesses such as shipbuilding and power equipment, and analysts have already factored in the value from these businesses into their target prices. The listing of Larsen and Toubro Infotech Ltd, planned for September this year, should also unlock value.
The company’s revenue growth guidance for the current year is 35-40%, although revenues are up 44% and net profit has risen 72% for the nine months to end-December. At around 37 times fiscal 2009 earnings, the stock is certainly not cheap, but the key reason for its attraction in an uncertain environment is its exposure to infrastructure building in two high growth regions: India and West Asia.
Tata Tea Ltd’s consolidated net profit rose about 11 times in the December quarter, buoyed by the sale of its stake in Glacéau to Coca-Cola Co. last year. But proceeds from the sale had already been factored in Tata Tea’s share price, and if anything, the company’s December quarter results only act as a reminder that it would miss the high-growth portfolio of Glacéau. Consolidated sales grew just 6.5%, and nearly 90% of incremental sales came from the domestic market. International revenues (consolidated sales minus stand-alone sales), which account for 70% of total revenues, grew by less than 1%.
Consolidated operating profit grew by 13.5%, because of margin improvement in the international operations—an analyst tracking the sector attributes this to higher coffee prices. But as was evident from the reaction to the results, the markets are unlikely to reward margin expansion alone, when revenue growth is missing. The domestic business grew by 22%, but then it accounts for just 30% of total revenues.
Some analysts were concerned at the time of the Glacéau sale that the company would find it difficult to replace the potential offered by the fast growing enhanced water category. The low growth in the December quarter somewhat validates that argument. But note that Tata Tea shares had underperformed after the Glacéau acquisition, on concerns that the leveraged buyout would be a drag on the company. The sale to Cola-Cola not only cleared the debt associated with the buyout but has resulted in a net cash inflow of about $400 million (Rs1,576 crore) for the company. (Part of the proceeds went to Tata Sons Ltd, which owned Glacéau stock jointly with Tata Tea.)
The stock rose sharply towards end-2007 on rumours of a large buyout, but corrected equally sharply in the recent market meltdown. At current levels, Tata Tea appears cheap at about 11 times estimated fiscal 2009 earnings, but unless there’s another reasonably large acquisition, the markets aren’t likely to get interested, given the sedate growth.
The only two sectoral indices that ended on Monday in positive territory were the Bombay Stock Exchange auto index and the Bankex. Note that both are rather sensitive to interest rate changes and with the credit policy due on Tuesday, punters seem to be betting on a policy shift by the Reserve Bank of India. Interestingly though, not all auto and bank stocks rose. The State Bank of India fell 4% while Tata Motors Ltd was flat. It’s certainly not a unanimous view.
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