After a sluggish June quarter, Larsen and Toubro Ltd (L&T) seems to have regained market confidence as it posted a robust September quarter. Net sales grew 17.7% year-on-year (y-o-y) at Rs9,260 crore, beating analyst consensus estimates. Its core business—the engineering and construction (E&C) segment—built the tempo with an 18% increase in growth on the back of strong execution. This lifted market sentiment, given the backdrop of a flattish y-o-y growth posted by this segment in the June quarter.
More importantly, the segment’s profit margin, before interest and tax, expanded y-o-y by about 1.11 percentage points. This was the result of a pick up in execution of large and higher margin-yielding projects, which rationalized fixed costs. The segment was also the largest contributor (92%) to order inflows worth Rs20,464 crore clocked during the quarter.Order inflows increased by 11% y-o-y. But the electrical and electronics segment, although comprising only 7-8% of L&T’s revenues, was a dampener; Revenues contracted by 5.1% and profit margin by about 2.04 percentage points y-o-y.
Graphic by Ahmed Raza Khan/Mint
“We have not seen much traction in the projects in this segment. So a combination of lower sales volumes and higher material costs together impacted profitability,” says R. Shankar Raman, senior vice-president (finance and legal). However, a recent revision of product prices in this segment, along with improved sales, should improve profitability in the coming quarters.
The machinery and industrial products segment, too, posted a 1.66 percentage point drop in profit margins in the quarter.
Yet, L&T’s net profit was a positive surprise at Rs765 crore— 32% higher than the year-ago period, led by a robust 19% growth in operating profit. However, Rs70.8 crore realized from selling stake in Satyam Computer Services Ltd boosted profits.
Interest costs rose y-o-y due to a rise in interest rates and higher borrowing. With the firm entering a phase of longer project cycles, interest costs could pressure margins in the medium term. This might also affect revenue visibility in the longer term.
L&T shares reacted positively to the results. They rose by 1.3% to Rs2,013, after having underperformed the key Sensex index since the June results. But what would sustain investor sentiment in the stock is its order inflow in the next two quarters. To meet the management guidance of 25% growth in order inflows for fiscal 2011, the firm needs about Rs60,000 crore worth of orders in the second half. Unless big-ticket orders happen in roads, railways and hydrocarbons, this seems an uphill task.
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