L&T confident on sales growth as margins pressured

L&T confident on sales growth as margins pressured

Mumbai: Indian engineering conglomerate Larsen & Toubro Ltd (L&T) said it was optimistic about growth this year while warning that a slowing global economy and higher costs may erode profit margins.

L&T on Monday reported a higher-than-expected 12% rise in fiscal first quarter profit, helped by a pick-up in project execution, and said higher orders in the infrastructure, upstream oil and gas and fertilizer sectors are likely to drive growth in coming quarters.

“The comfort which we have based on the numbers is reasonably high. Therefore, in terms of our overall guidance and indication to the market there is no change," chief financial officer Y. M. Deosthalee told reporters.

L&T, which operates in industries as diverse as engineering, shipbuilding and software, had forecast a 15-20% rise in order inflows during the current financial year to March 2012 and expects sales to grow 25%.

“Unless something drastic happens, based on the current assessment, we feel reasonably confident that 15% is achievable," Deosthalee said, referring to its order growth guidance earlier this year.

L&T has benefited from a construction boom over the past few years as Asia’s third-largest economy revamps its airports and roads and expands industrial capacity.

But stubbornly high inflation, a succession of interest rate rises since March 2010 and soaring commodity prices threaten the pace of growth.

The company gets 82% of its revenues from the domestic market, and another 16% from overseas orders.

Fresh orders in the quarter rose only 4% year on year to boost its order book to Rs1.36 trillion, but the firm said this was due to several projects not yet reaching the margin-recognition stage.

Margin Pressure

L&T said net profit for the June quarter rose to Rs746 crore ($166 million) from 6.66 billion a year ago. Net sales rose 21% to Rs9,483 crore.

A Reuters poll of 11 brokerages had forecast net profit of Rs720 crore on net sales of Rs9,500 crore.

Operating margins for its engineering and construction division, which accounts for 84% of the company’s revenue, fell to 11.9% from 13.7% a year earlier.

The company could see operating margins slip by up to 75 basis points this year if orders drop and commodity prices increase further, Deosthalee said.

Larsen has been taking on higher value projects in recent years to boost its profitability and announced over the weekend it had bagged three overseas orders worth $889 million from the hydrocarbon sector.

Shares in L&T, valued at more than $22 billion, ended 0.5% lower at Rs1,631.25 in a weak Mumbai market, after having risen as much as 2.2% after the earnings announcement.

The stock is down more than 17% this year, in line with a fall in the broader market.