A strong topline and cost escalation clauses have helped the firm protect its margins.
Engineering major Larsen and Toubro (L&T) has seen a strong 53 per cent growth in its topline for the June 2008 quarter at Rs 6,901 crore. What’s creditable is that despite a sharp increase in the price of raw materials, the operating profit margin (OPM) has remained flat at 9.5 per cent compared with that for the June 2007 quarter.
The company has been able to protect its margins partly because around 70 per cent of its engineering and construction projects have input cost escalation clauses built in. Moreover, this segment contributes the lion’s share of about 60 per cent to L&T’s consolidated revenues. The management believes it will be able to maintain margins at these levels for the current year.
What’s encouraging is that orders have been flowing in at a brisk pace: for the engineering segment, orders were up 28 per cent while, for the firm as a whole, orders during the quarter were up 24 per cent. The total size of the well-diversified order book is now Rs 58,195 crore.
The management says that while the environment is difficult, it hasn’t really seen any evidence of a slowdown in capital expenditure. It believes revenues for the firm can grow at around 30-35 per cent in the current year.
L&T is expected to end FY09 with revenues of Rs 31,500 crore and a net profit of close to Rs 2,400 crore.The stock currently trades at a price of Rs 2,724 and commands a price-earnings multiple of around 32 times on estimated stand-alone FY09 earnings. For the consolidated earnings, however, the multiple would be around 25 times, making the stock attractively valued.