L&T: On course

Margins in the engineering and construction segment improved by 250 basis points in Q4.

The Larsen & Toubro (L&T) stock has been a major gainer on the bourses as its results were ahead of analyst expectations. The company reported 73.7 per cent increase in its consolidated fully diluted earnings per share for FY07.

Consolidated operating margin also improved by 300 basis points y-o-y to 12.56 per cent. No doubt, its consolidated numbers include those of L&T Infotech and L&T Finance, but it is the standalone performance that has impressed analysts.

In Q4 FY07, L&T's operating margin improved by 170 basis points to 13.3 per cent. For the full year too, standalone margin was up 290 basis points to 10.11 per cent.

The reason for the strong performance is that a larger number of its projects under execution are entering the profit-booking threshold. Also, its recent orders have seen the contract size increasing.

For example, it had bagged two orders of over Rs 1000 crore in FY06, while in FY07, besides the Rs 5,565-crore Delhi airport project, it had three other Rs 1000-crore contracts.

The engineering and construction segment grew 33.6 per cent y-o-y during the March 2007 quarter, and accounts for over three-fourths of the company's revenues. Since the margin in this segment improved by 250 basis points in Q4 and 300 basis points for FY07, the overall margins were buoyed.

Over the past two years or so, the company has focused on higher margin orders, which seems to be working. At the end of the quarter, the engineering and construction order book was up 3.5 per cent sequentially and 46 per cent y-o-y at Rs 35,333 crore.

Margins also improved in the machinery and industrial products division by 350 basis points in FY07 as sales improved 58 per cent on higher sales of industrial valves, construction equipment and welding systems.

The electrical and electronics business didn't see the margin expansion of other divisions, but that's because of higher cost of raw materials and keen competition.

With a healthy order book and buoyant activity in the infrastructure space, the Larsen & Toubro stock trades at about 23 times estimated FY08 earnings and should be an outperformer.

Tata Chem: Peppy numbers

Tata Chemicals, a manufacturer of fertilisers and inorganic chemicals, appears to have posted strong numbers for the March 2007 quarter with an operating profit margin of 19 per cent, a rise of 600 basis points y-o-y, but that's mainly because of a significant difference in inventory position.

Besides, the company has postponed purchases of traded goods as a result of which the tab on expenses is smaller. However, the growth in top line in the fourth quarter has been about 6.5 per cent which is reasonably good.

For the full year, Tata Chemicals has turned in net sales of Rs 3,991 crore, a growth of 13.4 per cent and operating margins have been stable at 17.2 per cent and the net profit at Rs 444 crore is up 26 per cent, boosted by higher other income.

The outlook for soda ash, which contributes about 20 per cent of its revenues, is good with spot prices hovering in the region of $210-230 a tonne and this should fetch Tata Chemicals better profits.

However, things are not so rosy on the fertiliser front "" there is a worldwide shortage of phosphoric acid, a key input for fertilisers, with prices ruling at $566 a tonne, a rise of $105 since last year.

At the current price of Rs 256, the stock trades at just under 14 times estimated FY08 earnings. The stock has underperformed in the markets for about a year now.