After dropping as much as 3.6 per cent intra-day, the stock of Larsen and Toubro (L&T) closed marginally higher (up 0.3 per cent), as order inflows, the order book, sales and net profit for the December quarter exceeded the Street’s expectations. The gains could have been more if the company had not disappointed on of operating profit margin, which fell 120 basis points on an annual basis.
The management has maintained its earlier order inflow growth expectation (revised from 15-20 per cent to 5 per cent in the September quarter) but feels it is a tough task. Thus, the near-term business approach remains cautious.
Meanwhile, the stock, which had underperformed broader markets last year, has gained 27 per cent in a month on hopes that the interest rate cycle would reverse and the company would be a big beneficiary. At Rs 1,273, the stock trades at a reasonable 16 times FY13 estimated earnings and factors in the near-term concerns, say analysts, many of whom are positive on it.
| MARGINS UNDER PRESSURE | |||
| In Rs crore | Q3' FY12 | FY12E | FY13E |
| Revenues | 13,999 | 53,149 | 62,589 |
| Y-o-Y change (%) | 22.8 | 21.1 | 17.8 |
| Operating profit | 1,343 | 6,249 | 7,006 |
| Y-o-Y change (%) | 9.0 | 11.1 | 12.1 |
| Adjusted net profit | 992 | 4,107 | 4,744 |
| Y-o-Y change (%) | 23.0 | 13.3 | 15.5 |
| E: Estimates Source: Company, Analysts report | |||
Angel Broking analyst Shailesh Kanani says: “We maintain L&T as our top pick in the E&C (engineering & construction) space due to its comfortable leverage position, strong order book position (Rs 1,45,768 crore), superior return ratios and less dependence on capital markets for raising equity for funding projects.”
Nevertheless, the market would be monitoring the flow of new orders in the coming months and RBI’s rate stance, before re-rating the stock.
Q3: Above estimates
In the December quarter (Q3), the execution of order book in the E&C division (revenues up 25 per cent) helped L&T clock robust net sales growth of 23 per cent, despite a higher base (rise of 40.3 per cent) in the same quarter a year ago. However, operating profit margin slipped below 10 per cent for the first time in three years, and, at 9.6 per cent, was significantly below analysts’ expectations of about 11 per cent. The decline on a year-on-year basis was at the higher end of the company’s estimate of a dip of 75-125 bps. Notably, it does not see a significant deterioration in margins, thanks to the softening of commodity prices.
In the E&C division, the profit before interest and tax (PBIT) margin remained stable because of the price variation clause for a majority of contracts and the smart raw material procurement strategy. But, performance of electrical and electronics (limited opportunity, lower volumes and an increased competitive intensity), as well as the machinery and industrial products division (slowdown in industrial sector, mining policy issues), continued to be under pressure, both in terms of sales and the PBIT margin.
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Excluding an extraordinary item of roughly Rs 35 crore in the same period last year, net profit grew a strong 23 per cent largely led by a jump of 79 per cent in other income to Rs 449 crore (or 45 per cent of reported profit). However, a high proportion of other incomes to reported net profit has been a norm (an average 52 per cent for the last eight quarters preceding Q3) and is likely to continue.
Chief financial officer R Shankar Raman says: “The company has cash and cash equivalents (temporary surplus) of $1 billion and receives dividends from subsidiaries. There could be spikes in other incomes during a quarter, depending on money market conditions.”
The order inflow, at Rs 17,129 crore, has exceeded expectations due to a pick-up in orders from the infrastructure sector (45 per cent of total order inflows). However, the jump of 28 per cent comes on a lower base — the corresponding quarter a year ago had seen order inflows falling 25 per cent, compared to the December 2009 quarter. This helped the company meet its order inflow target for the nine months ended December 2011. The share of slow moving orders, at 10 per cent of the total order book, has also not increased. This augurs well for revenue growth.
For achieving the targeted growth of five per cent in order inflow for 2011-12, the company needs to garner orders worth Rs 34,400 crore in the current quarter. This looks tough, given the slowdown in India and economic pressures across international markets.
Also, delays in order finalisation are worrying. Besides, competition for L&T is rising in the power and hydrocarbon space, while issues of land acquisition and mining policy are also impacting India Inc’s growth plans. Nevertheless, the company has not revised downwards its order inflow growth expectation further, as there are no dramatic cancellations.
Raman adds: “A couple of orders could swing the percentage in order inflow growth from plus to minus five per cent. As of today, about a third of the projects we pursue seem to get deferred (some by three months and some even more). But, we will give our best shot at the revised guidance, while being aware that it is not going to be easy.”