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L&T: holding on, but just about

L&T: holding on, but just about
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First Published: Fri, May 30 2008. 12 45 AM IST

Updated: Fri, May 30 2008. 12 45 AM IST
Investors have taken heart from Larsen and Toubro Ltd’s results for the March quarter and its one-for-one bonus issue, with the stock rising 6.4% on the National Stock Exchange on Thursday.
With rising raw material costs, difficulties in getting components and questions about the speed of execution, capital goods companies have faced challenging times recently. But in the fourth quarter, L&T has been able to tackle these issues more than adequately.
To be sure, there are initial signs of a slowdown. For instance, gross sales and service revenue for the March quarter increased by 34.7% compared with a year earlier. In the December quarter, the pace of increase had been much higher, with similar growth at 54%. Also, while profit after tax excluding exceptional gains has gone up 27% compared with last year, growth on the same metric had been 40%.
Nevertheless, the company has maintained operational growth. Operating profit growth in the March quarter is up 36.4% than a year ago, an increase comparable with the 38% growth in the December quarter. Orders continue to be strong, with inflows growing at 56% in the March quarter, compared with 37% in the December quarter.
Clearly, as far as L&T is concerned, the industrial slowdown is nothing to write home about. In spite of the rise in input costs, earnings before interest, taxes, depreciation and amortization, or Ebitda, margins for the March quarter have been maintained above 13%, about the same as a year ago.
There is, however, a crucial caveat in its outlook.
In January, after posting December quarter results, the company said in its statement that “given the strong fundamentals in the economy to support a sound growth trajectory of the capital goods sector, the company’s businesses are well positioned to reap the benefits of this growth momentum.”
Now, after showing an excellent set of numbers for the fourth quarter, this is what the company had to say: “While macro-economic fundamentals continue to inspire confidence, the recent slowdown in the industrial sectors, coupled with rising input costs, particularly oil price, and credit squeeze, may have an impact on the capital goods sector’s ability to sustain the growth momentum in the medium term.”
The difference in sentiment is palpable, although the company management says it will grow at 35% this year, too. The problem is the growth is already in the price, with the stock quoting at around 27 times of what analysts estimate it willearn for the fiscal year that began on 1 April. In the current bear market, few will have the stomach to pay such valuations.
Reliance Power shares could hold more surprises
There has arguably been no corporate action in recent history that has confounded investors as much as the selective bonus issue of Reliance Power Ltd.
In February this year, after the stock fell from its initial public offer (IPO) price of Rs450 a share, the company announced that it would issue bonus shares to minority shareholders.
As a result, their stake would rise from 10.09% to 15.22%. Other things remaining the same, this should have led to a commensurate (50%) increase in the share price from the pre-bonus announcement levels of Rs385, since promoter shares were locked in and only minority shares were trading in the market.
But the shares traded only 17% higher at Rs450 after the bonus ratio was announced. They now trade at Rs408, just 6% higher than the levels before bonus announcement. Minority shareholders who have held on have hardly gained.
In fact, for those who were allotted shares in the IPO at Rs450 a share, it continues to be a losing proposition.
For some shareholders, however, the hope of making a profit stays alive. They believe when the shares trade at ex-bonus prices from Friday onwards, the price correction may not be in direct proportion to the bonus ratio.
Other factors remaining the same, Reliance Power should ideally trade at Rs255 ex-bonus to reflect the 3:5 bonus ratio.
But since Reliance Power’s share price has defied similar logic in the past, shareholders may be surprised on friday.
The ex-bonus prices should finally settle the issue of what the firm is actually worth. If prices behave as they should, i.e. they trade at around Rs255, Reliance Power’s market capitalization would be Rs61,120 crore, a 40% discount to the valuation of more than Rs1 trillion at the time of the IPO.
Minority shareholders may not have lost much, thanks to the ingenious bonus issue, but at the firm level, there has been tremendous value erosion.
But again, the Bombay Stock Exchange’s Power index has fallen 38% from its 52-week high in early January, which shows the company isn’t unusually ahead of others in eroding value.
Write to us at marktomarket@livemint.com
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First Published: Fri, May 30 2008. 12 45 AM IST