Going gets tougher for L&T as profit trips
Rising input costs, slowdown in industrial growth, worsening macro-economic environment and turmoil in global financial markets seem to be catching up with Larsen & Toubro.
By Krishna Kant, TNN |
Rising input costs, slowdown in industrial growth, worsening macro-economic environment and turmoil in global financial markets seem to be catching up with Larsen & Toubro, India���s largest engineering and construction company.
During the quarter ended March 2008, the company reported 38% year-on-year growth in net profit on stand-alone basis, much lower than the 72% growth visible during the first nine months of 2007-08. The growth in net sales during the same period slowed down to around 36% against 47% growth recorded during April-December 2007. That the demand environment is getting tougher was partly visible in the five-fold jump in inventories to a record 3% of its revenues in March 2008 quarter against a decline in inventory during the same quarter last year.
Operating profit was affected by rising input prices, leading to 55% rise in raw material costs in Q4. This included expenses on construction materials such as steel, cement and aggregates. The cost push translated into a marginal 39-basis point decline in operating margin, excluding other and extra-ordinary income.
That���s a little disappointing result for a company that was trading at a price-to-earning multiple of nearly 40 times its trailing 12-month earning per share. To sustain such a high valuation, the company would have to deliver EPS growth of over 40% on a consistent basis. This will be hard to achieve, given the challenging global economic environment, coupled with rising fuel and input prices.
L&T share price, however, rose by more than 6% to close at Rs 2,882.3 per share on the NSE buoyed by bonus share announced by the company. The board also approved a dividend of Rs 17 per share, which translates into a disappointing dividend yield of less than 0.6%.
The slowdown is mainly attributed to the company���s electrical and electronic and industrial machinery divisions, which grew much slower than the overall growth in the company. The company���s engineering and construction division, which accounts for over 70% of company's revenues, continue to outperform with 38% and 52% growth in revenues and profit before interest and taxes.
On a consolidated basis, the growth in bottomline was also affected by market-to-market losses on derivatives of around Rs 270 crore. The company's consolidated net profit, excluding extra-ordinary income, grew by just 27.3%, much lower than 44% growth in revenues and 41% growth in operating profit. Derivative losses lead to a 36% fall in other income to Rs 684.4 crore in the March 2008 quarter against over Rs 1,000 crore last year.
The company, however, maintains that demand environment continues to remain benign and it has stuck to its outlook of 30-35% growth in revenues and net profit in FY09. The management optimism is based on 40% growth in outstanding orderbook to over Rs 50,000 crore by the end of FY08, sufficient enough to keep the company busy for another 24 months at current rate of execution. Only time will tell how justified this optimism is.
During the quarter ended March 2008, the company reported 38% year-on-year growth in net profit on stand-alone basis, much lower than the 72% growth visible during the first nine months of 2007-08. The growth in net sales during the same period slowed down to around 36% against 47% growth recorded during April-December 2007. That the demand environment is getting tougher was partly visible in the five-fold jump in inventories to a record 3% of its revenues in March 2008 quarter against a decline in inventory during the same quarter last year.
Operating profit was affected by rising input prices, leading to 55% rise in raw material costs in Q4. This included expenses on construction materials such as steel, cement and aggregates. The cost push translated into a marginal 39-basis point decline in operating margin, excluding other and extra-ordinary income.
That���s a little disappointing result for a company that was trading at a price-to-earning multiple of nearly 40 times its trailing 12-month earning per share. To sustain such a high valuation, the company would have to deliver EPS growth of over 40% on a consistent basis. This will be hard to achieve, given the challenging global economic environment, coupled with rising fuel and input prices.
L&T share price, however, rose by more than 6% to close at Rs 2,882.3 per share on the NSE buoyed by bonus share announced by the company. The board also approved a dividend of Rs 17 per share, which translates into a disappointing dividend yield of less than 0.6%.
The slowdown is mainly attributed to the company���s electrical and electronic and industrial machinery divisions, which grew much slower than the overall growth in the company. The company���s engineering and construction division, which accounts for over 70% of company's revenues, continue to outperform with 38% and 52% growth in revenues and profit before interest and taxes.
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On a consolidated basis, the growth in bottomline was also affected by market-to-market losses on derivatives of around Rs 270 crore. The company's consolidated net profit, excluding extra-ordinary income, grew by just 27.3%, much lower than 44% growth in revenues and 41% growth in operating profit. Derivative losses lead to a 36% fall in other income to Rs 684.4 crore in the March 2008 quarter against over Rs 1,000 crore last year.
The company, however, maintains that demand environment continues to remain benign and it has stuck to its outlook of 30-35% growth in revenues and net profit in FY09. The management optimism is based on 40% growth in outstanding orderbook to over Rs 50,000 crore by the end of FY08, sufficient enough to keep the company busy for another 24 months at current rate of execution. Only time will tell how justified this optimism is.
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