Larsen & Toubro: Engineering profits

E&C segment has boosted Larsen & Toubro's margins

Though Larsen & Toubro's sales growth was muted at 11.64 per cent y-o-y to Rs 4,122 crore in the December 2006 quarter, its operating profit grew a smart 53 per cent to Rs 425.5 crore.

As a result, its operating profit margin was up 282 basis points y-o-y to 10.3 per cent, beating analysts' expectations of 8.5 to 9 per cent. Even in the September quarter, its operating profit margin had improved by 383 basis points to 7.71 per cent.

Analysts say a larger number of contracts are nearing completion, and their contribution to profits has increased. Raw material costs, which were 230 basis points higher on a y-o-y basis as a percentage of sales, did not affect L&T's margins.

Sub-contracting charges were 15.5 per cent lower, but staff expenses have risen 29 per cent y-o-y "� a combination of more employees and higher wages.

At the end of December, the company had a healthy order backlog of Rs 34,142 crore in the key engineering and construction (E&C) segment, which is up 49 per cent y-o-y and 16.6 per cent q-o-q.

It was the E&C segment that brought most of the margin improvement, as the segment margin improved 320 basis points to 10.3 per cent. Electrical and electronics segment had a revenue growth of 26 per cent, but margins declined 90 basis points to 14.7 per cent.

L&T had provided a 30 per cent y-o-y growth guidance in its order book for FY07, which it should cross comfortably.

The company management has said it will post higher revenues in the fourth quarter.

According to its guidance of a 25 per cent growth in revenues and operating profit, Q4 sales will have to be around Rs 7,100-7,200 crore, which may come about due to its strong order book (during the quarter, the company bagged its largest contract ever "� Rs 5,400 crore order from GMR for the Delhi airport).

The L&T stock was unchanged after its results on Monday, and trades at about 29 times estimated FY07 earnings and 23 times FY08 earnings.

TVS Motor: Input blues

With both motorcycles and scooters volumes declining y-o-y in the face of strong competition, TVS Motor has had a dismal December quarter.

As a result, sales are up just 7 per cent y-o-y at Rs 935 crore. To make matters worse, raw material costs as a percentage of sales have jumped by over 400 basis points to 75.3 per cent due to which the operating profit margin has dipped by nearly 400 basis point to just 3.2 per cent.

The poor performance is somewhat surprising because sales in the first two quarters of the current financial year were fairly strong at 26 per cent y-o-y and 37 per cent y-o-y, respectively.

With the 100 cc StarCity contributing a major portion to the company's sales, the margins are likely to remain under pressure. The company has some new launches in store, but it could be a while before the benefits of the new models are seen.

TVS will be commissioning two new plants over the next few months, including one in Indonesia and one in Himachal Pradesh. It also plans a foray into three-wheelers.

The stock currently trades at its 52-week low of Rs 74 and is expensive at a forward multiple of nearly 18 times FY08 estimated earnings.