L&T:Disappointing show

While L&T’s December quarter results and cut in its 2009-10 guidance are disappointing, most analysts believe it to be a blip.

Larsen & Toubro’s (L&T) stock fell 10 per cent over two days on the back of a disappointing performance for the December 2009 quarter. On Thursday, India’s largest engineering company, L&T reported a five per cent decline in comparable standalone revenues, while adjusted net profits were up by 15 per cent. On the positive side, profit margins were better and the trend in order flow was healthy, which suggests that the December quarter performance is a blip and things should look up going ahead.

Short-term set back
For the December 2009 quarter, L&T reported a 5 per cent decline in comparable revenues (excluding the RMC business which was sold last year) to Rs 8,071 crore due to poor performance of its engineering and construction (E&C) division. The division (nearly 85 per cent of L&T’s revenues) reported a 7.8 per cent decline in revenues due to execution impediments and customers in the infrastructure and hydrocarbon sectors deferring orders. Positively, the division reported a 120 basis points improvement in profit margins to 13.4 per cent helped by lower input costs.

L&T’s other two divisions namely, electrical & electronics (E&E) and machinery & industrial products (MIP), saw revenues growing 11 per cent each, helped by the ongoing industrial recovery and higher demand for construction and mining equipment. Positively, the MIP business reported a strong 650 basis points rise in profit margins to 21.9 per cent led by cost control and better realisations. Together, E&C and MIP led to a 130 basis points year-on-year rise in L&T’s standalone operating profit margins to 12.4 per cent for the quarter. Thereafter, a 43 per cent decline in interest costs was partly offset by a rise in depreciation. While L&T’s reported net profits halved to Rs 759 crore (as last year’s quarter included Rs 916 crore of gain on sale of RMC business), profits from core activities were up 15 per cent at Rs 696 crore.

New order trend healthy
While the sales decline during the December quarter is seen as a blip, strong order flow from the power generation sector led to 23 per cent year-on-year improvement in E&C division’s order inflow to Rs 16,465 crore. Total order inflows for the nine-months of 2009-10 were up 17 per cent at Rs 45,700 crore. And, as on end-December 2009, L&T’s total order book stood at Rs 91,100 crore representing an increase of 32 per cent year-on-year. With the order trend looking healthy, L&T should close the year with an order book of around Rs 100,000 crore.

Conclusion
The December quarter results also saw the company management lowering its revenue growth guidance from 15 per cent to 10 per cent for 2009-10, which further dampened market sentiments. An area of concern is the export market, wherein sales have fallen (across the three key divisions) during the quarter and the company is yet to see a recovery in order inflows. For the nine months ending December 2009, L&T’s standalone revenues were up just 1 per cent and net profit by 18 per cent.

Considering the performance so far and the lower guidance, analysts expect L&T to end the year with revenue growth of 8-9 per cent and adjusted net profit growth of 10-11 per cent; for 2010-11, they have lowered growth estimates but expect revenue and profits to grow by 15-20 per cent each.

At Rs 1,472.35, the stock is trading at a P/E of 24.3 times its estimated 2010-11 earnings, which leaves limited scope for appreciation in the near-term given that analysts have put a SOTP target of Rs 1,650-1,700. The medium-term prospects of L&T, however, would depend on the pace of domestic spending on infrastructure and industrial capex, recovery in global economies and L&T’s progress in new segments (power equipment, shipping), which in turn would reflect on its stock price. Long-term investors may consider the stock on declines.

(source:BS)