Larsen & Toubro: Trading blues

Hedging losses to impact FY08 profits.

The L&T management has said it would be incurring commodity trading losses of an estimated Rs 100-150 crore in its 100 per cent subsidiary L&T International FZE.

In FY07, L&T International FZE had posted profits of Rs132.9 crore during FY 07, most of which -- Rs 122.2 crore""came from gains on commodity hedging.

While the losses will not impact stand-alone numbers for the Rs 17,692 crore engineering major, they would make some difference to the consolidated results and analysts now expect that the net profit for FY08 would be lower by about 7-10 per cent at around Rs 2,400 crore.

Consolidated revenues for FY08 are estimated in the region of Rs 23,800 crore. In FY07, L&T posted a consolidated net profit of Rs 2240 crore.

Not surprisingly, the L&T stock closed nearly 9 per cent lower on Monday at Rs 2,729. At these levels, the stock trades at around 33 times FY 08 estimated earnings and about 27 times estimated FY09 earnings.

At Rs 1910, the public sector BHEL trades at 22 times FY09 estimated earnings, In the past one year, L&T has been a star performer on the courses, gaining 102 per cent compared with a 24 per cent rise in the Sensex.

With both corporate capital expenditure and investments in infrastructure still largely on track, L&T , is expected to post a top line growth of about 25-28 per cent over the next couple of years. Having built up scale, the company is well positioned to leverage it over the next few years.

It is among the most diversified players in the construction space and should record operating margins of between 11.5-12 per cent over the next few years.

Since about 60 per cent of the company's business comes from non-infrastructure corporate capital spending, L&T' remains less vulnerable to margin pressures than some of its peers. Unlike smaller engineering firms, who have seen their order book grow less than anticipated, L&T's order book remains strong.

IDFC: An expensive asset

At a price of $205 million (Rs 800 crore) Infrastructure Development Finance Company(IDFC) hasn't bought Standard Chartered's asset management business cheap.

Indeed, the deal, at 5.6 per cent of the assets under management AUM), appears all the more expensive because equity assets account for just about 30 per cent of the total AUM of about Rs 14,000 crore.

UBS, it may be recalled, had offered to pay just about 4 per cent of the AUM and that was not too long ago. The IDFC stock, which has lost 28 per cent from its peak of Rs 235 in January 2008, fell over 7 per cent on Monday to close at Rs 157.

IDFC has so far been primarily a wholesale player ""it lends to infrastructure projects in areas such as energy, transportation and telecom. Where the retail business of asset management fits in, is therefore not too clear.

According to the management, the idea is to grow fee-based businesses and diversify the revenue stream without spending too much capital. How profitable the AMC business can be, in a competitive market, remains to be seen.

Meanwhile, IDFC's loan book has grown at an impressive pace over the past few years with outstanding disbursements growing at about 50 per cent.

While the asset book is expected to grow at about 30-35 per cent in the next couple of years, spreads are likely to be under some pressure given the increasing competition.

In FY07, IDFC, the company earned a net income of Rs 504 crore and this is expected to grow to about Rs 725 in FY08. At Rs 157,the stock trades at about 20 times FY09 estimated earnings and a price to estimated book value of just over 3 times and is not cheap.