Larsen & Toubro: Core attraction

Larsen has done well in controlling costs

Larsen & Toubro's (L&T) fourth quarter performance with an 8 per cent y-o-y growth in its standalone income from operations to Rs 4,628 crore is disappointing, considering the ongoing boom in the engineering sector.

As a result, operating profit growth of 29.72 per cent to Rs 577.38 crore too fell short of analyst expectations. But the good thing for the quarter is the 207 basis point improvement in operating profit margin to 12.48 per cent.

The company has done quite well in controlling costs, as total costs went up only 5.65 per cent. Raw material costs declined almost 400 basis points in Q4 helped by lower steel prices, but the cost of construction material went up 27 per cent, owing to higher cement prices.

In its consolidated FY06 performance, the company posted a 14.23 per cent growth in its top line along with a 34.31 per cent rise in operating profit.

Consolidated operating profit margin went up by 143 basis points to 9.56 per cent. Order booking for Q4 FY06 was at a healthy Rs 6107 crore and for the full year, order bookings were 49 per cent higher at Rs 22,318 crore, including export orders of Rs 4,000 crore.

Hydrocarbon and infrastructure sectors account for a large portion of its current order book.

Both steel and cement prices are higher right now, but it will not be much of a problem as long as the company can pass on the costs to its customers.

Also, analysts expect the proportion of high margin projects to have increased in the past few months. Going forward, the company expects the order book to grow at 30 per cent and revenues to rise by 20-25 per cent.

Along with the Sensex gaining 0.88 per cent and the announcement of a bonus, the L&T stock gained 1.17 per cent to Rs 2295 on the BSE.

With the market decline, L&T had corrected by almost 30 per cent. At its current price, the stock trades at a reasonable 21-22 times estimated consolidated FY07 earnings.

SAIL: Melting point

SAIL's results for FY06 were lacklustre, as was expected. Operating profit fell 36.65 per cent y-o-y to Rs 6847.4 crore in the last financial year, despite net income falling only 1.7 per cent to Rs 28,778.6 crore.

However, results for FY06 are not strictly comparable with the corresponding period of the previous year as the company had merged had merged IISCO with itself on April 2005.

Nevertheless, operating profit margin of the combined entity fell 1311 basis points y-o-y to 23.79 per cent in the last financial year.

Earlier, Tata Steel had also seen its operating profit margin for FY06 declined by 253 basis points y-o-y to 39.17 per cent. FY06 operating margins declined owing to a fall in realisations and higher raw material costs.

Realisations are estimated to have fallen 6.5 per cent y-o-y to Rs 25,467 per tonne in FY06. SAIL had sought to offset the weaker pricing environment via value-added products such as plates, wheels and axles.

Competitor Tata Steel's realisations are estimated to have fallen 7 per cent y-o-y to Rs 34,265 a tonne in FY06.

The fourth quarter was especially painful. SAIL's operating profit margins fell a staggering 2573 basis points y-o-y to 16.44 per cent in the March 2006 quarter. But the first quarter of FY07 will be better.

There has been a recovery in steel prices in the past two to three months, which will help the company improve its operating margins.

These expectations helped the stock gain 3.5 per cent to Rs 77.4 on Thursday. Despite the rise, the stock appears attractively valued at about 5.3 times estimated FY07 earnings.