BackL&T: markets ignore good results and worry about slower order bookings
L&T: markets ignore good results and worry about slower order bookings
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Larsen and Toubro Ltd’s (L&T) revenue grew robustly in the December quarter, but the pace of order inflows appeared to confirm market fears about a slowdown in new projects for the sector.
The country’s largest engineering and construction (E&C) conglomerate reported a sharp 25% year-on-year (y-o-y) drop in order inflows to ₹ 13,366 crore. The firm’s shares reacted adversely, closing 1.7% lower at ₹ 1,681 apiece. This is on the back of a 15% fall in the past fortnight, and underperforming the BSE Sensex.
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The y-o-y growth in revenue was a key highlight of the quarter. Net revenue grew 40.3% y-o-y to ₹ 1,141.83 crore. L&T’s core E&C business clocked a 43% jump in sales, as execution and billings were stronger than in the past two quarters. The other two segments— electrical and electronics (E&E) and machinery and industrial products—too posted higher revenue.
The E&C business’ profit before interest and tax, which accounts for about 82% of the total, was 24% higher than a year ago. The E&E segment’s profits, though a relatively smaller contributor, reported flatter growth due to higher raw material costs. The L&T management explained that increases in metal prices such as copper and silver affected margins, as these are passed on to consumers with a lag.
On the whole, raw material costs rose to around 27% of sales—about 800 basis points higher than the year-ago period. This affected operating profit margin, which at 10.8% during the quarter was 160 basis points lower over the year-ago period, and also about 60 basis points lower sequentially. A key reason for lower profitability is lower margins in newer orders. Also, about 30% of the projects do not have an escalation clause, exposing the company to cost pressures.
However, with its faster pace of execution, the firm contained interest costs as a percentage of sales.
L&T’s reported net profit was 11% higher on a y-o-y basis at ₹ 840.5 crore. After adjusting for exceptional items, largely from the sale of subsidiaries, net profit was 31% higher on a y-o-y basis at around ₹ 811 crore.
L&T’s management reiterated that revenue will rise about 20% and maintain a stable profit margin during fiscal 2011. To achieve this, revenue will have to grow 23-24% y-o-y in the next quarter, which is not difficult. What is of greater concern, and is affecting its valuations, is the gap in the guidance for order inflows, as achieving ₹ 37,000 crore of orders during the next quarter is a tall order.
Graphic by Yogesh Kumar/Mint
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