L&T: markets ignore good results and worry about slower order bookings

L&T: markets ignore good results and worry about slower order bookings

Larsen and Toubro Ltd’s (L&T) revenue grew robustly in the December quarter, but the pace of order inflows appeared to confirm market fears about a slowdown in new projects for the sector.

The country’s largest engineering and construction (E&C) conglomerate reported a sharp 25% year-on-year (y-o-y) drop in order inflows to 13,366 crore. The firm’s shares reacted adversely, closing 1.7% lower at 1,681 apiece. This is on the back of a 15% fall in the past fortnight, and underperforming the BSE Sensex.

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The y-o-y growth in revenue was a key highlight of the quarter. Net revenue grew 40.3% y-o-y to 1,141.83 crore. L&T’s core E&C business clocked a 43% jump in sales, as execution and billings were stronger than in the past two quarters. The other two segments— electrical and electronics (E&E) and machinery and industrial products—too posted higher revenue.

The E&C business’ profit before interest and tax, which accounts for about 82% of the total, was 24% higher than a year ago. The E&E segment’s profits, though a relatively smaller contributor, reported flatter growth due to higher raw material costs. The L&T management explained that increases in metal prices such as copper and silver affected margins, as these are passed on to consumers with a lag.

On the whole, raw material costs rose to around 27% of sales—about 800 basis points higher than the year-ago period. This affected operating profit margin, which at 10.8% during the quarter was 160 basis points lower over the year-ago period, and also about 60 basis points lower sequentially. A key reason for lower profitability is lower margins in newer orders. Also, about 30% of the projects do not have an escalation clause, exposing the company to cost pressures.

However, with its faster pace of execution, the firm contained interest costs as a percentage of sales.

L&T’s reported net profit was 11% higher on a y-o-y basis at 840.5 crore. After adjusting for exceptional items, largely from the sale of subsidiaries, net profit was 31% higher on a y-o-y basis at around 811 crore.

L&T’s management reiterated that revenue will rise about 20% and maintain a stable profit margin during fiscal 2011. To achieve this, revenue will have to grow 23-24% y-o-y in the next quarter, which is not difficult. What is of greater concern, and is affecting its valuations, is the gap in the guidance for order inflows, as achieving 37,000 crore of orders during the next quarter is a tall order.

Graphic by Yogesh Kumar/Mint

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