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L&T’s operating profit jumped by 36% to `2,901 crore, beating Bloomberg consensus estimates by 20%. Photo: Priyanka Parashar/Mint
L&T’s operating profit jumped by 36% to `2,901 crore, beating Bloomberg consensus estimates by 20%. Photo: Priyanka Parashar/Mint

L&T: Stage set for unlocking value

The infra company's comfortable order book of `1.63 trillion assures revenue momentum for the next 2-3 years

“We have been able to get over the storm and good days are ahead of us," Larsen and Toubro Ltd (L&T) group executive chairman A.M. Naik said at a media briefing after announcing results for the March quarter on Friday. Such positive tidings backed by robust operating performance and strong guidance of 20% growth in orders in 2014-15 are bound to prop up its stock price.

The thing to look out for over the next 24 months is unlocking of value or monetizing of assets expected in its subsidiaries. In the analysts’ conference call, the management spelt out strategies to list two of IT units by July 2016. Assets would be monetized through L&T Infrastructure Development Projects Limited (L&T IDPL) to raise growth capital to spend on projects, which was so far funded by the parent. As this unfolds, pressure on the parent’s cash flows will ease. Net working capital was 22% of sales in the March quarter, higher than 17% in the year-ago period, increasing cash outflows for working capital.

Another positive move is the creation of an independent entity in the Gulf to cash in on growth opportunities. The quarter’s 11% increase in net revenue to 20,079 crore came from international business, which posted a 30% year-on-year growth compared with a mere 8% growth in domestic markets.

The infra company’s comfortable order book of 1.63 trillion assures revenue momentum for the next 2-3 years. This is after 15,000 crore worth of slow-moving or doubtful orders were removed. Of course, the stand-alone entity reported no growth in orders in the quarter compared with a year ago, mainly due to the pre-election freeze.

L&T’s established levers across most business segments positions it well to profit for the next leg of the investment cycle, according to a Motilal Oswal report.

Further, L&T’s edge over most other infra firms is that the large order book garnered through challenging times has not come at the cost of profitability. Operating margin (before adjusting for provisioning write-backs) at 14.4% was 276 basis points higher than the year-ago period, supported by lower raw material costs, favourable geographic mix and timely completion of projects (a basis point is one-hundredth of a percentage point). The highest margin expansion was seen in power, real estate and infrastructure. Operating profit jumped by 36% to 2,901 crore, beating Bloomberg consensus estimates by 20%.

In spite of higher working capital needs and rise in finance charges, lower tax helped post a 37.5% rise in net profit at 2,239.4 crore, beating the street’s forecast by 36%.

Our analysis of the December quarter results had said the next three months’ performance will decide earnings prospects. Assuming that the worst is over and the pace in earnings growth is set firmly, the stock is likely to head north in the medium to long term. L&T is also likely to report consolidated numbers every quarter, beginning with the next one. Analysts view this as a positive step, which would give a holistic picture on business prospects and performance of the group.

In spite of a drop in the share price on Friday, L&T’s stock has outperformed the benchmark Sensex. It has returned 44% since January as the shares rallied in spite of the infrastructure firm watering down 2013-14 order intake guidance by five percentage points in December.

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