Larsen and Toubro (L&T)'s Q1FY2011 earnings were below market expectations mainly hit by slower execution in the company's engineering and construction (E&C) business. However, the company has indicated that execution is expected to pick up in H2FY2011.
L&T has reported a subdued 6.4 % year-on-year (y-o-y) increase in its stand-alone revenue to Rs7,835.1 crore led primarily by slower execution in E&C division. The E&C division reported a mere1.1% y-o-y growth in revenue, which is sharply lower than expectation. This dismal growth was due to longer execution cycles arising from increasingly complex long cycle jobs. The management has indicated that due to lagging effect of large orders booked in H2FY2010, the execution is expected to pick pace from H2FY2011 only, which implies that execution will continue to remain sluggish even in Q2FY2011. The electricals & electronics (E&E) division?s revenue was up by 29.4% yoy, driven by favourable domestic industrial climate. The Machinery & Industrial Products (MIP) division reported a 25.5% y-o-y growth in revenue, led by a favourable base effect and industrial recovery particularly in construction and mining business.
The operating profit margin (OPM) improved by 150 basis points to 12.2%, driven by operating leverage and lower input cost for E&C division. Other segments are however facing cost pressure on account of rising metal prices. The employee cost was up by 20% yoy in line with increase in manpower.
The other income was marginally up to Rs277 crore with the interest cost rising by 29.9% yoy to Rs142.3 crore. The net profit (net of extraordinaries) came in at Rs666.2 crore, implying a y-o-y growth of 15.2%.
The overall order inflow picked up during the quarter, up 63% yoy, at impressive Rs15,626 crore with the order inflow for E&C division up by 65% during the year. The orders mainly stemmed form power and infrastructure space. A noticeable order could be Rs5,200-crore order bagged by L&T Power Development Project in association with the state electricity board (SEB) in Rajpura. L&T's current order backlog stands at Rs1,07,816 crore, out of which Rs1,05,554 crore orders are for the company's E&C segment. This provides strong visibility to the company's earnings. The investments are expected to remain robust in fertiliser and road space, and hydrocarbon space in the Middle East
L&T's management has maintained 20% revenue growth guidance for FY2011. However, due to lagging effects of the large orders taken in HFY2010, where pick-up in execution is expected only from H2FY2011, The revenue will continue to be sluggish in Q2FY2011 also. However, on margins front, the company has indicated towards slight stress in FY2011 in view of rising cost of metal and other inputs, though the margins of the E&C segment is expected to be maintained at FY2010 level (at 12.7%). Further, value unlocking for its finance services business is expected in FY2011 either via private placement or initial public offer.
At the current market price, the stock is trading at 24.9x FY2011E and 20.7x FY2012E consolidated earnings.
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