L&T: Capex push

Engineering major steps up its capital expenditure to execute rising orders

Larsen & Toubro (L&T) reported robust growth on a y-o-y basis in the December 2007 quarter, thanks to continued buoyancy in the capex cycle.

In the last quarter, however, its operating margins were under pressure due to a rising cost structure. As a result, its operating profit grew 50.1 per cent y-o-y to Rs 692.5 crore in the third quarter of FY08, while its total operational income improved 54.9 per cent to Rs 6,384.9 crore. Its operating profit margin also declined 40 basis points y-o-y to 10.8 per cent in the December quarter.

This pressure on L&T's operating margins was due to its sub-contracting charges as a percentage of the total operational income rising 100 basis points y-o-y to 21.5 per cent in the December 2007 quarter. The stock declined 1.2 per cent to Rs 3,844.5 on Monday.

L&T's order inflow during the last quarter was Rs 13,019 crore, a growth of 37 per cent y-o-y. In its key engineering and construction division, which accounted for 77.7 per cent of the total operational income in the third quarter of FY08, the segment profit improved an impressive 74.75 per cent y-o-y to Rs 568.3 crore in the last quarter.

The segment profit in its machinery and industrial products division more than doubled, while the division's revenues grew 42 per cent.

Going forward, the company's growth will be powered by its outstanding order-book in the engineering and construction division, which amounted to Rs 47,605 crore at the end of the third quarter of FY08 compared with Rs 42,028 crore at the end of the September 2007 quarter.

The company has also provided a positive outlook for both its key markets "" India and West Asia. The stock trades at 49 times estimated FY08 and 38 times FY09 earnings, given its growth potential in the medium term.

SBI: Flat margins

State Bank of India (SBI) reported a good financial performance in the December 2007 quarter. The net interest income grew 23.8 per cent y-o-y to Rs 4,257 crore as advances and deposits went up a robust 25.6 per cent and 26.2 per cent respectively.

However, net interest margins were marginally down by 12 basis points for the nine months ended December 2007 to 2.83 per cent and were flat compared with the first half of FY08.

This was because of an increase in the cost of funds and a 220 basis points decline in the share of the current and savings account (CASA) ratio to 41.1 per cent of total deposits.

Other income jumped 48 per cent to Rs 2,697 crore, largely led by stable growth in the fee-based income, robust forex income, even as profit on sale of investments nearly doubled.

The operating profit jumped 55.9 per cent to Rs 3,661 crore due to better control over operating expenditure, which increased 13 per cent. Net profit jumped about 70 per cent to Rs 1,809 crore despite a 44 per cent rise in the total provision.

The bank will be coming out with its rights issue of approximately Rs 17,000 crore.

This will boost the bank's capital adequacy ratio of 12.28 per cent in December 2007 and help expand its asset base.

Meanwhile, the consolidation process of the bank with its associate banks could be delayed as employees are not yet in agreement.

At Rs 2,321, the stock trades at 1.9 times and 1.7 times its estimated book value for FY09 and FY10 respectively, excluding the value of its investments of around Rs 500 crore.

This price appears attractive, considering the bank's market leadership, the potential unlocking of value in subsidiaries such as insurance and mutual funds and a merger with associate banks sooner or later.

With contributions from Amriteshwar Mathur and Priya Kansara