Engineering growth

L&T's core business drives performance in Q3

Grasim Industries has reportedly arrived at an informal understanding with Larsen & Toubro (L&T) to offload 14.95 per cent of the 15.74 per cent stake that it holds in the engineering company to L&T's employees' trust.

The deal will enable the trust to skirt the mandatory open offer had it bought out Grasim's entire stake. Analysts point out that since the whole process is part of a court-approved restructuring plan, an open offer is not mandatory.

However, in view of Grasim's rather trying experience earlier when it took over the Reliance stake, the management is probably making doubly sure now that it won't need to make an open offer.

Meanwhile, L&T's net profit has risen 26 per cent to Rs 101.43 crore in the quarter ended December 31, 2003. This was largely due to an upturn in the company's core engineering and construction division, as its earnings before interest and tax (EBIT) jumped 24.4 per cent to Rs 113.14 crore.

The company recently managed a breakthrough in the lucrative offshore gas handling sector in the Middle East and this should drive profitability going forward as well.

The performance of the company's other divisions was mixed. The cement division has not done well as weak price realisations resulted in EBIT dropping 68 per cent to Rs 12.47 crore in the last quarter.

However, with the company going ahead with the demerger of its cement business, the lacklustre performance of this division should not be a cause for worry in the future.

The electrical and electronics division, which accounts for a mere 8 per cent of sales, has done better with EBIT jumping 25 per cent to Rs 31.06 crore.

Operating profits grew 9.75 per cent to Rs 176.82 crore in the quarter ended December 2003, and operating profit margins were steady at 6 per cent.

The demerger of the cement division should help the company focus its resources and capital on the key engineering and construction division, for which it has globally recognised technical expertise.

Also, the company's efforts to get into more sophisticated engineering projects both in India and overseas would not only help it to move up the value chain but also grab a larger portion of the booming projects and turnkey business segments.

Customer base key to BSES

The Reliance group has announced that it will set up a 3, 500 mw gas - based power plant in Uttar Pradesh. The move is expected to help group company BSES expand its distribution network in the power-starved northern markets by inter-connecting with state electricity boards.

Analysts point out that Reliance's past track record in successfully implementing large projects should help BSES achieve this goal in 2-3 years. But a larger customer base is crucial to sustain future growth in profit.

Meanwhile, BSES has reported a 538 per cent jump in its net profit to Rs 93.3 crore in the quarter ended December 2003. The sharp rise in the bottom line could be attributed to two factors "" a 58 per cent jump in net sales of electrical energy to Rs 899.22 crore and a 154 per cent jump in other income to Rs 44.13 crore.

If other income is left out of the picture, net profit would amount to Rs 49.17 crore in Q3FY04 as compared with a loss of Rs 2.75 crore in the previous year.

While the company's core operations have grown, certain input costs have skyrocketed. Cost of fuel has surged 130 per cent to Rs 264.33 crore in Q3 FY04.

Analysts point out that while the Dahanu thermal power station makes optimum usage of key inputs like coal, at the Samalkot and Goa Power stations coal usage has to be brought up to international standards.

Another reason for the rise in cost of fuel has been the jump in the international prices of coal by 10 per cent in the second half of 2003. These costs are expected to be in check in the future, with the government recently reducing import duties and the company actively taking steps to upgrade its facilities.

Also, staff costs have jumped 128 per cent to Rs 64.95 crore due to a wage revision with employees. In spite of higher expenses, the rise in revenues was more than enough to hike operating profits in Q3 FY04 by 142 per cent to Rs 214.77 crore and operating profit margins by 7.16 percentage points to 20.46 per cent.

Going forward, apart from the northern markets, the company is planning to expand aggressively in the western markets. The company has already filed five applications with Maharashtra Electricity Regulatory Commission (MERC), coupled with an application for grant of distribution license in South Mumbai, an area which is currently covered by BEST.

Also the company has filed its annual revenue requirement (ARR) petition for FY2003 - 2004, which is a tariff revision petition. Once that is approved by MERC, it would help to drive revenue growth in the next few quarters.

With contributions by Amriteshwar Mathur