Larsen & Toubro Ltd (Q1 FY15)

LT’s standalone topline of Rs103.4bn was higher by 5.2% yoy, but lower than our estimate of 9.2% yoy growth.

August 02, 2014 3:57 IST | India Infoline News Service
CMP Rs1,524, Target Rs1,790, Upside 17.5% 
  • Standalone topline growth was lower than expected due to weaker execution in export orders

  • Consolidated numbers were quite weak due to higher losses in its hydrocarbon subsidiary and slower execution in international orders

  • Consolidated order inflow for the quarter was higher by 11% yoy at Rs334bn, largely contributed by international orders. Order book for the consolidated entity stood at Rs1,954bn, up 13% yoy

  • Standalone revenue of Rs103.4bn was lower than our estimate due to demerger of Technology services business

  • Operating margin for the company expanded by 198bps yoy on the back of improved performance by the infrastructure segment and no loss related to currency movements during the quarter

  • The company has maintained its guidance of 15% yoy growth in consolidated revenue and 20% yoy growth in order inflows for FY15

  • On a consolidated level, the impact of onetime gains from selling stake in Dhamra Port was offset by losses in the Hydrocarbon business

  • The company reported a net loss of Rs7.1bn in the hydrocarbon segment as it has provided for future losses

  • Working capital continued to increase due to lower customer advances and stagnant customer payments

  • Infrastructure segment to boost earnings; Maintain BUY rating with a price target of Rs1,790

Result table
(Rs mn) Q1 FY15 Q1 FY14 % yoy Q4 FY14 % qoq
Net sales 103,376 98,239 5.2 200,791 (48.5)
Material costs (44,171) (39,101) 13.0 (102,655) (57.0)
Sub-contracting charges (26,136) (25,787) 1.4 (43,494) (39.9)
Personnel costs (9,005) (9,892) (9.0) (12,296) (26.8)
Other overheads (13,191) (14,542) (9.3) (13,337) (1.1)
Operating profit 10,873 8,917 21.9 29,010 (62.5)
OPM (%) 10.5 9.1 144 bps 14.4 (393) bps
Depreciation (2,609) (1,868) 39.7 (2,138) 22.0
Interest (2,719) (2,424) 12.2 (3,049) (10.8)
Other income 4,880 4,871 0.2 4,953 (1.5)
PBT 10,425 9,496 9.8 28,775 (63.8)
Tax (3,204) (2,852) 12.3 (6,381) (49.8)
Effective tax rate (%) 30.7 30.0 22.2
Adjusted PAT 7,221 6,643 8.7 22,394 (67.8)
Adj. PAT margin (%) 7.0 6.8 22 bps 11.2 (417) bps
Extra ordinary items 1,714 - - 4,841 (64.6)
Reported PAT 8,936 6,643 34.5 27,235 (67.2)
Ann. EPS (Rs) 31.1 43.2 (28.0) 96.7 (67.8)
Source: Company, India Infoline Research

Slower execution in international orders led to an underperformance in topline

LT’s standalone topline of Rs103.4bn was higher by 5.2% yoy, but lower than our estimate of 9.2% yoy growth. The lower than expected topline growth was largely due to lower execution in its international orders. Overseas revenue registered a decline of 16.1% yoy in Q1 FY15. However, this impact was negated by a revival in domestic infrastructure spending. Domestic revenues grew 9.2% yoy due to a change in sentiment in the market. Infrastructure segment continued to be the revenue driver for the company in Q1 FY15 by registering a growth of 23.7% yoy. Share of infrastructure segment of total sales increased from 43% in Q1 FY14 to 64.7% in Q1 FY15. Except infrastructure segment, all other segments registered a decline in revenues. The most impacted during the quarter were the power segment and metallurgical and material handling segments, which declined 26.6% yoy and 16.9% yoy respectively. The hydrocarbon business has been demerged into a separate entity and hence the numbers are reclassified for the corresponding quarters. Consolidated revenue growth was mainly led by execution of infrastructure projects, improved performance in services business (Infotech and Financial Services) and value monetisation in IDPL. Consolidated revenue for the quarter stood at Rs189bn, higher by 10.1% yoy. 

Margin expansion continues led by infrastructure and other segments

LT managed to register an increase of 21.9% yoy in operating profit on the back of strong execution in infrastructure segment, no forex loss in the quarter and higher contribution from the others segment. OPM too for the quarter was higher by 144bps yoy to 10.5%, quite higher than our estimate on the back of strong contribution from the others division. Except others, all major segments reported a margin squeeze on a yoy basis. The company witnessed a 20bps contraction in infrastructure business segment EBIT. Improvement in revenues from the real estate division in Powai, Mumbai led to a sharp jump in EBIT from others segment. A decrease in losses in the shipbuilding division also led to higher contribution from the others segment. EBIT margin for the heavy engineering division was lower by 150bps yoy. Employee costs were lower on a yoy basis as the as employee costs related to Technology services division are now clubbed with Infotech division (subsidiary). On a consolidated basis, operating profit was higher by 34.3% yoy at Rs25.1bn led by higher contribution from non-infra business and a onetime gain on sale of Dhamra Port. However, after removing the impact of Dhamra port sale, operating profit was quite weak on account of the loss reported in the hydrocarbon segment. Removing the asset sale in IDPL, operating profit margins declined by ~400bps yoy due to loss in Hydrocarbon and lower than expected margin expansion in other businesses.

Consolidated order inflow rises 11% yoy

LT managed to register 11% yoy growth in order inflows in the consolidated entity at Rs334bn (including service orders which are effectively converted to service revenues during the quarter). Order inflow was lower than the management guidance of 15% yoy. Share of exports of total order inflows increased to 44% during the quarter as the domestic market remained sluggish in the power, hydrocarbon and metals space. The company believes that the pace of order announcements is yet to pick up and expects this to be seen in H2 FY15. Of the total order inflows, infrastructure segment accounted for 43% of total order inflows, followed by hydrocarbon division with 17% and services with 16%. Total order book at the end of Q1 FY15 stood at Rs1,954bn, higher by 13% yoy. Export orders accounted for 26% of the total consolidated order book. Of the total order book, infrastructure segment accounts for 70%, followed by power at 9% and Hydrocarbon at 7%. The management maintained its guidance for order inflow growth of 20% yoy in FY15 for the consolidated entity on the back of huge opportunities from the Middle-East and on expectations of a revival in the domestic infrastructure spending. The company is expecting orders for the hydrocarbon segment to jump in FY15 largely due to huge capex in Kuwait.

Segmental Results (Standalone)
  Q1 FY15 Q1 FY14 % yoy Q1 FY15 Q1 FY14
Sales (Rs m) Sales Contribution (%)
Infrastructure 67,554 54,526 23.9 64.7 54.8
Power 9,358 12,749 (26.6) 9.0 12.8
MMH 9,027 10,869 (16.9) 8.6 10.9
Heavy Engineering 8,071 8,509 (5.1) 7.7 8.5
Electrical and automation 7,698 7,944 (3.1) 7.4 8.0
Others 2,758 4,939 (44.2) 2.6 5.0
Total 104,466 99,536 5.0
EBIT (Rs m) % yoy EBIT contribution (%)
Infrastructure 6,492 5,379 20.7 64.3 54.5
Power 350 985 (64.5) 3.5 10.0
MMH 884 1,382 (36.0) 8.8 14.0
Heavy Engineering 731 899 (18.6) 7.2 9.1
Electrical and automation 635 703 (9.6) 6.3 7.1
Others 1,001 521 92.1 9.9 5.3
Total 10,093 9,868 2.3
EBIT margins (%) bps yoy
Infrastructure 9.6 9.9 (25)
Power 3.7 7.7 (399)
MMH 9.8 12.7 (292)
Heavy Engineering 9.1 10.6 (150)
Electrical and automation 8.3 8.8 (60)
Others 36.3 10.5 2,575
Total 9.7 9.9 (25)
Source: Company, India Infoline Research

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