L&T: Return of the king

The engineering giant, backed by growth in the Indian economy, is making a comeback on the road to profitability.

After a disappointing performance in the first three quarters of FY10, the engineering major Larsen & Toubro reported solid numbers in the quarter ended March 2010. The impact on the share price was obvious; the stock gained 5 per cent outperforming the benchmark indices. Sales, including other operational income, jumped 28 per cent year-on-year (y-o-y) to Rs 13,585 crore — the highest in the past five quarters.

A strong pick-up in execution in the engineering and construction division added to this. However, mechanical and industrial products division lagged, as order flows to the key industrial valves business was affected on account of global slowdown. Operating profit margins were flat at about 15 per cent, as total expenditure rose 28 per cent due to an increase in raw materials, construction expenses and employee costs.

Net profit, excluding extraordinary items like stake sale in Bangalore International Airport, rose just 17 per cent to Rs 1,337 crore. The 40-per cent rise in other income on account of higher dividends from subsidiaries and profit from Satyam stake sale was unable to compensate tripling of interest costs and 79 per cent higher tax provisions.

With an order-book size of more than Rs 1 lakh crore, the company is expected to remain on the growth track. However, rising input costs and higher interest rates will be prime concerns for L&T, as these can put operating margins and profits under pressure. Also, competition — especially in businesses like power generation, power equipments and road build-operate-transfer — will keep margins under check.

While outlook for core business has sharply improved with revenue-visibility, the performance of key subsidiaries in FY10 could repeat. At 18 times and four times price to estimated earnings and book value for FY12, L&T is seen to be a fairly-valued scrip.