The December quarter results for Larsen and Toubro Ltd, or L&T, allayed some fears analysts had harboured about the company. Revenue grew by an impressive 35% and operating profit rose by a healthy 22% on a year-on-year basis. Margins shrank by about 100 basis points (one basis point is one-hundredth of a percentage point), but that had been expected given higher raw material prices. Since commodity prices have now corrected and the firm would have used much of its high-cost inventory, cost pressure on this front should ease.
Order booking continues to be strong. Excluding the giant Rs5,500 crore order L&T got from the Mumbai airport in the October-December quarter of 2007-08, order inflows rose by 95% to Rs14,620 crore. The current order book of Rs68,800 crore amounts to two times annual sales, giving ample comfort as far as revenue visibility goes. Much of the revenue from the Mumbai airport project is expected to be booked in the next fiscal year, which should help the company achieve steady growth in FY10 as well.
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One of the concerns some analysts had was the rapid pace at which L&T added debt on to its books this fiscal. At the end of March, it had debt worth Rs3,600 crore. In the first three quarters of this fiscal, it has taken additional debt of Rs2,800 crore. Now, cash generation from operations (net profit plus depreciation) during these three quarters and divestitures have led to cash inflow worth at least Rs3,000 crore. And capital expenditure during this period was a mere Rs1,360 crore. The question was, why did the company need to raise debt capital when internal accruals seemed sufficient? The worry was that working capital needs were rising out of proportion due to the slowdown in the economy.
But the company’s reported net working capital of 13.8% of revenues is well in control and as a result analysts are quite relieved. Net working capital to sales stood at 10.5% in the previous fiscal. According to the company, collections from customers hasn’t been affected materially, which is in stark contrast to Bharat Heavy Electricals Ltd, which has witnessed an increase in its debt collection period. The debt apparently has been raised to be prepared for capex needs of the future, keeping in mind tight liquidity conditions.
Of course, some of these funds (about Rs650 crore) seem to have been used to buy the 12% stake in Satyam Computer Services Ltd, which the markets are evidently not happy about.
L&T shares had underperformed the market by about 15% since the Satyam stake news came out, but the strong results have helped the stock recoup some of those losses.
Graphics by Paras Jain / Mint
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