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Larsen & Toubro (L&T) posted a 111 per cent year-on-year (y-o-y) growth in consolidated net profit in the first quarter of FY15 on the back of gains from the stake sale of its finance services arm L&T Finance Holdings and Dhamra Port, a joint venture between L&T and Tata Steel.
The exceptional gains include profit from the stake sale of L&T Finance Holdings and City Union Bank (total Rs 198 crore), and Rs 1,350 crore from sale of Dhamra Port to Adani Group in May. Gains from the sale of Dhamra Port have been included in revenues from operations.
The infrastructure, realty and shipbuilding segments also did well, enabling the company to wipe out Rs 942 crore of segment loss in its hydro carbon business arising out of time overruns and changes in contract conditions. Hydrocarbon contributes seven per cent of its order book with most new orders coming from West Asia.
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Excluding these exceptional items, consolidated revenues for the quarter are flat, while net profit would have been lower marginally.
Reported net profit more than doubled to Rs 967 crore from Rs 458 crore in the same period last year. Reported revenue rose 10 per cent to Rs 18,975 crore in the first quarter of this financial year against Rs 17,241 crore in the year-ago period. In a break from the trend, L&T announced consolidated results because a majority of businesses are now being carried out through subsidiaries and joint ventures.
On a standalone basis, the company reported a five per cent revenue growth to Rs 10,338 crore, 22 per cent (37 per cent like-to-like) growth in earnings before interest, taxes, depreciation, and amortisation (Ebitda) to Rs 1,088 crore and 35 per cent growth in profit after tax (PAT) to Rs 894 crore-recurring PAT was up nine per cent at Rs 722 crore. The standalone segment, which includes infrastructure (making up 70 per cent of order book), contributes 55 per cent to the consolidated revenue.
The company's standalone revenue growth was lower than analyst estimates, but made up for the shortfall registering higher margins. "L&T reported revenues of Rs 10,337 crore, which were lower than our estimates. But, the company more than made up for this shortfall by registering strong Ebitda margins, which were higher by 140 basis points to 10.5 per cent," said Sanjeev Zarbade, vice-president (private client group research) at Kotak Securities.
While interest cost also remained benign, which aided profit growth, depreciation is higher by Rs 75 crore due to revision, according to the new Companies Act. Adjusted for exceptional item of Rs 171 crore, the (standalone) profit after tax stood at Rs 722 crore, which is in line with our estimate of Rs 716 crore, Zarbade noted.
"The divestment of stake has helped the company show good profit growth. Operationally, the result has been weak. Except infrastructure and realty business, all other segments have underperformed," another analyst remarked. However, what continues to impress is the flow of new orders. In the first quarter, L&T bagged Rs 33,408 crore worth of orders on a consolidated level, up 11 per cent y-o-y. Operating margins rose 240 basis points to 13.3 per cent. Sixty per cent orders came from infrastructure and hydrocarbon businesses and nearly half of the orders in the first quarter came from abroad.
Among individual businesses, while infrastructure business showed strong growth in revenue, margins and profits, the company's other segments reported a drop in profit. The hit for hydrocarbon business was due to increase in wages in the Gulf region, changes in contract conditions including mandatory hiring of locals in the Gulf, time and cost overruns, and delays from clients.
L&T's chief financial officer R Shankar Raman said the company had to incur additional expenses and make provisions of about Rs 900 crore. These are on account of five projects valued at about Rs 10,000 crore and are now nearing completion. Raman said the company will not incur the same costs going forward as it has sharpened its risk management policy, decided to go in for sub-contracting instead of hiring local staff in the Gulf, and strengthened its project management team. Most of the hydrocarbon projects are fixed-price based and there is no opportunity for a pass-through of additional expense, he added.
According to Raman, there was no change in 20 per cent and 15 per cent order and revenue growth guidance but said the margins could be impacted by 1-1.5 percentage points (100-150 basis points) due to problems in hydrocarbon business. The company continues to suffer from slowdown in the domestic market with the number of slow-moving projects rising to 12 per cent (from 10 per cent in the March quarter) of the order book.
"We are not revising guidance downward. Revenue will depend on execution and we are not taking our foot off the accelerator in execution of projects. We are waiting for domestic industry to pick up. We expect recovery. Though big-ticket items like power and industrial capital expenditure is slow, we expect opportunities in urban transport, building and factories, heavy civil works and water.
