BMA Wealth Creators Equity Research

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EQUITY RESEARCH

RESULT UPDATE LARSEN & TOUBRO LIMITED

indushree@bmastock.com 033 40000182

15th

May 2012

Result Highlights

Key Market Indicators

Net Sales Growth: Engineering and construction conglomerate Larsen & Toubro (L&T) Ltd, enthuse the streets with its Q4FY12 market beating results, even its failure to meet the FY12 order book guidance did not affect the market much. The company reported revenues of Rs 18460.9 crore for the fourth quarter ended March FY12 as against Rs 13983.61 crore, posting an increase of 32.02% on Q-o-Q basis. Similarly on YoY basis, revenues rose by 20.97% from Rs 15261.17 crore of the corresponding year quarter. Further, for the year ended FY12, the total revenue of the company jumped by 21.1% to Rs 53170.52 crore as against Rs 43905.9 crore last year.

Operating Margin: For Q4FY12, the company reported a 412 bps sequential increase in operating profit margin to 13.87% from 9.75% of the previous quarter. This was due to the rise in the operating profit by 87.73% to Rs 2560.76 crore from Rs 1364.07 crore of the previous quarter. However on YoY basis, operating profit margin dropped by 149 bps from 15.36% of the corresponding year quarter. This was despite the increase in the operating profits by 9.27% from Rs 2343.55 crore of the corresponding year quarter. Further, for the year ended FY12, the operating Profit of the company increased by 11.4% to Rs 6282.61 crore from Rs 5639.57 crore last year.

Bottom-Line Growth: L&T’s net profit margin posted an increase of 331 bps to 10.4% from 7.09% of the previous quarter. This was due to the rise in the bottom-line by 93.68% to Rs 1920.41 crore from Rs 991.55 crore of the previous quarter. However on YoY basis, net profit margin posted a drop of 65 bps from 11.05% of the corresponding year quarter. This was again despite the rise in net profit by 13.89% from Rs 1686.21 crore of the corresponding year quarter. Further, for the year ended FY12, the net profit of the company increased by 12.1% to Rs 4456.5 crore as against Rs 3957.89 crore last year.

Future Outlook: L&T is targeting a growth of 15-20% in its earnings for 2012-13 and its focus will be on the West Asian markets in the current fiscal.

Developments: L&T previously believed India was enough to offer growth, but currently they are looking to mitigate that risk to Saudi Arabia which alone can yield Rs 5370 crore in revenue.

Snapshot (Standalone)

Price Performance

Rs in Crore

Shareholding Pattern %

Price (14/05/12) 1159.4

Action NEUTRAL

Face Value 2.00

52 Week H/L 2212.7/1302.65

Book Value (Rs.) 411.87

P/BV 2.81

P/E 15.91

BSE Code 500510

NSE Symbol L&T

Bloomberg Code LT IN

Reuters Code LART.BO

Share Outs (Cr.) 122.48

Mkt.Cap (Rs.Cr.) 71001.65

467.

Promoters 0.00

FII 19.65

DII 36.63

Others 43.72

Q4FY12 Q4FY11 Y-o-Y % FY12 FY11 Y-o-Y %

Net Sales 18460.9 15261.17 20.97 53170.52 43905.9 21.10

Total Expenditure 15900.14 12917.62 23.09 46887.91 38266.3 22.53

PBIDT 2929.96 2927.5 0.08 7675.89 7119.94 7.81

Profit After Tax 1920.41 1686.21 13.89 4456.5 3957.89 12.6

P/E(x)(TTM) 15.91 17.77 -10.48 15.90 17.75 -10.41

EPS (Unit Curr.) 31.37 27.7 13.25 72.92 65.33 11.62

Larsen & Toubro Limited

BMA Wealth Creators Equity Research

Outlook

Performance Movers & Shakers: L&T’s March quarter performance mirrors its strong execution capabilities. Revenue growth was led by a 23% growth in its Engineering and Construction (E&C) division, which accounts for the optimism on the street. But the company’s order inflows fell by a sharp 30% to Rs 21000 crore during the March quarter from a year ago, whereas, annual order inflows for the fiscal 2012 dropped 12% to Rs 70574 crore from the previous year, the first YoY drop since FY08. The rising costs and competitive pressures affected profitability across segments. Raw material & contracting costs rose YoY as a percentage to sales, but were lower than December quarter. Further, the staff cost rose on account of restructuring in compensation and manpower build-up.

Conclusion: L&T is banking on overseas markets to fuel growth as it braces tapering order inflows, deferment of capital expenditure and fresh investment decisions in the domestic markets. Company is doing well in UAE and Oman. It is planning to improve its market share in Qatar, Kuwait and Saudi Arabia, which are expected to have tremendous potential. The US investments in shale gas have led to an increased production of natural gas liquids and this has opened up a greater demand for downstream facilities for the company. The spillover of order inflows expected in earlier quarters and its edge in E&C projects both in domestic and international markets are expected to uptick from the second half of FY13. However, given high inflation, sluggishness in the industrial activity and competitive pressures, a margin recovery seems unlikely in the medium term. The company expects to maintain its profit margins of 11.8% in FY13, with 50 bps volatility. But in the current dried up order inflow situation, the guidance for FY13 seems to be aggressive. The guidance on order inflows seems steep and the company is expected to come under pressure on multiple fronts. Even if it manages to execute well, maintaining this kind of growth in revenues and profit will be a challenge. Its lack of pricing power and rising raw material costs are affecting the margins. Meanwhile, the long positive track record, the huge correction in its price and ambitious FY13 guidance gives out positive signals, but the dropping order inflows and cautious market conditions cannot be overtly ruled out. Thus, we recommend a NEUTRAL opinion on the stock of Larsen & Toubro Ltd. The macro environment affects capital goods and construction companies the most because steel, power and other big manufacturing industries slow down their capital expenditure plans and, therefore, cut back on giving big orders to engineering and construction companies. So, when the going is good, capital goods players ride piggy, back on the overall boom. But today’s reality of high interest burdens and order backlogs is ensuring that most companies take a knock on their turnover and growth. One needs to stay a little cautious on this sector because the cycle still remains weak. As long as the cycle remains weak, serious performance won’t come in. If inflationary pressures continue, the ability to maintain margins will be difficult. L&T is banking upon its robust backlog of orders worth Rs 142,185 crore to deliver a 25% revenue growth. The company firmly expects to report a growth of 20 per cent in revenue and 10 per cent in profits in the current financial year. Further, the current headwinds are reflected in the stock, which has underperformed the Sensex since the start of September. Thus, inspite of all the negativity prevailing in the market, we do not see much need to change the company’s growth expectations for FY12 in a significant manner. We recommend a neutral opinion on the stock of Larsen & Toubro Ltd until any further developments are noticed.

Financial Overview (Standalone)

Rs in Crore

Q4FY12 Q3FY12 Q4FY11 Q-o-Q % Y-o-Y % FY12 FY11 Y-o-Y %

Gross Sales 18645.77 14140.49 15395.52 31.86 21.11 53737.78 44296.1 21.31

Excise Duty 184.87 156.88 134.35 17.84 37.60 567.26 390.24 45.36

Net Sales 18460.9 13983.61 15261.17 32.02 20.97 53170.52 43905.9 21.10

Other Income 369.2 427.14 583.95 -13.56 -36.78 1393.28 1480.37 -5.88

Total Income 18830.1 14410.75 15845.12 30.67 18.84 54563.8 45386.2 20.22

Total Expenditure 15900.14 12619.54 12917.62 26.00 23.09 46887.91 38266.3 22.53

PBIDT 2929.96 1791.21 2927.5 63.57 0.08 7675.89 7119.94 7.81

Interest 121.09 190.71 126.25 -36.51 -4.09 666.1 619.25 7.57

PBDT 2808.87 1600.5 2801.25 75.50 0.27 7009.79 6500.69 7.83

Depreciation 180.36 180.33 235.77 0.02 -23.50 699.46 599.22 16.73

Tax 720.2 392.22 731.87 83.62 -1.59 1814.13 1776.58 2.11

Deferred Tax -12.1 36.4 147.4 -133.24 -108.21 39.7 167 -76.23

Profit After Tax 1920.41 991.55 1686.21 93.68 13.89 4456.5 3957.89 12.60

Extra-ordinary Items 39.93 - 149.05 - -73.21 38.84 223.27 -82.60

Adj Profit After EO Item 1880.48 991.55 1537.16 89.65 22.33 4417.66 3734.62 18.29

PBIDTM(%) 15.87 12.81 19.18 - - 14.44 16.22 -

PBDTM(%) 15.22 11.45 18.36 - - 13.18 14.81 -

PATM(%) 10.4 7.09 11.05 - - 8.38 9.01 -

P/E(x)(TTM) 15.91 16.75 17.77 -5.03 -10.48 15.90 17.75 -10.41

EPS (Unit Curr.) 31.37 16.21 27.7 93.52 13.25 72.92 65.33 11.62

Larsen & Toubro Limited

BMA Wealth Creators Equity Research

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