Larsen & Toubro’s bonus offer fails to excite investors

Despite having achieved its revenue and order inflow growth guidance for FY13 and announcement of a bonus in the ratio of 1 share for every 2 held, Larsen & Toubro’s financial performance last fiscal failed to impress investors on quite a few counts.

The company reported a 7% decline in net profit in the fourth quarter of FY13 given high interest costs and a 180-basis point contraction in EBITDA margins following competitive pricing, cost pressures and execution of some fixed price contracts.

Margins for the full year (FY13) too were lower by 130 basis points at 10.5% over FY12. This is in fact the third consecutive decline in L&T’s EBITDA margins since FY11 when it reported healthy margins of 12.8%.

L&T’s interest cost as a percentage of sales rose by 36 basis points in FY13 to 1.61% even as its total debt declined by over 10% over the previous year to Rs 8,800 crore.

Given an almost flat growth in profit before interest and tax (PBIT) over the past year, there is a visible deterioration in the company’s interest coverage ratio compared to the previous couple of years.

The management has said that there has been an increase in its average borrowings (long term) pursuant to an increase in operating activities. Also, cost of funds has also gone up from an average of 8.1% in FY12 to 8.8% in FY13, leading to a spike in interest outflow.

The increase in borrowing levels, though in line with the volume growth of company’s operations has impacted L&T’s working capital. According to the management, the working capital in relation to sales deteriorated to 16% for the year against 12% a year ago.

Given the ambitious revenue targets that L&T has guided for FY14 in a tight credit environment, there could well be further stress on working capital this fiscal. The company has guided for a growth of 20% in order inflows and 15-17% growth in revenues for FY14.