Larsen and Toubro (L&T’s) Q1FY2010 results were a mixed bag. While the sales fell short of our expectation, the profits were in line with our expectation led by higher-than-estimated other income.
On a like-to-like basis the stand-alone top line grew by 11% to Rs7,362.7 crore, which was lower than our expectation.
In Q1FY2009 revenues to the tune of Rs269 crore came from ready mix concrete (RMC) business which was sold in H2FY2009 therefore the reported sales are up by only 6.7% year-on-year (y-o-y).
The topline growth was primarily driven by a 17.9% increase in the revenues of the engineering & construction (E&C) division.
The revenues of the machinery and industrial products (MIP) division continue to remain under pressure and were down 31.3% yoy.
The profit before interest and tax (PBIT) margin of the E&C division improved by 94 basis points (y-o-y) to 10.6%. The PBIT margin of the electricals & electronics (E&E) division remained flat at 11.8%, while that of the MIP division fell by 133 basis points to 21.8%.
The fall was however lower than our estimate. Consequently, the overall operating profit margin (OPM) improved by 100 basis points yoy to 10.7%, leading to a 17.4% growth in the operating profit to Rs786.3 crore for the quarter.
The margin improvement was predominantly due to execution of better margin yielding projects.
During the quarter, the company reported a 20% decline in the order inflows to Rs9,571 crore. The order backlog of the company now stands at Rs71,653 crore, which is an increase of 23% y-o-y.
The decline in order inflows is primarily due to curtailment of capital expenditure (capex) by global clientele, while in the domestic market the order inflows dried up due to elections.
In spite of the decline in order inflows during the quarter, the company continued to maintain its guidance of 25-35% increase in the orders. This implies close to 35-40% growth in order inflows over the next nine months of the fiscal.
We have fine-tuned our estimates post the Q1FY2010 results. Our earnings per share (EPS) for FY2010 and FY2011 now stands at Rs66.3 and Rs79.5 respectively.
The current order book translates into a book-to-bill ratio of 1.8x. While the current order book provides visibility to revenues, we feel the key trigger for the stock will be the incremental order inflows going forward.
We maintain our HOLD recommendation on the stock with a revised price target of Rs1,533.