Stock Review: L&T

L&T SURPRISED the street with a better-than-expected set of numbers for the September 2010 quarter. Sales and profit growth for the last quarter was in sharp contrast to its performance during the last few quarters, which was a source of worry for analysts.

   A slowdown in the growth of the order book, should it persist, could be a worry going forward. Yet the company appears well placed to achieve its growth targets for the year.
   The strong revenue growth coupled with margins improvement was the main highlight of the company's September 2010 quarter results. L&T's topline for the quarter grew 17.8% to 9,331 crore — almost twice the growth rate achieved in the 12-month period till June 2010 quarter.

   Its operating margins improved slightly by 20 basis points to 10.8% despite rising commodity prices, and it registered a healthy 22% jump in its net profit excluding the impact of extraordinary income.

   The growth tempo continued for the company in its main business segment of engineering and construction with a revenue growth of 17% and 110 bps improvement in the segment margins. This hints at a pick-up in the speed of conversion of order book into revenues. Machinery and industrial products' segment emerged as the second largest segment for the company with a 37% jump in revenues to 698 crore. The electricals and electronics segment registered a 5% dip in revenues to 672 crore.

   The company had registered a 63% jump in order inflow during the June 2010 quarter, but the order inflow during the September quarter was only 11% higher on y-o-y basis at 20,464 crore. The company reported a slowdown in the process of awarding contracts to its customer industries. According to its estimates, contracts worth nearly 40,000 crore that were to be awarded during the September quarter were pushed to the second half of the year. A slowdown in the Middle East also impacted the company's overseas order book. Although the current unexecuted order book stands strong at 115,393 crore — more than three times its FY10 revenues — investor sentiment could dampen if the growth of order inflow continues to be slow in the coming quarters.

   Taking into account the latest results, L&T's valuation is now 34 times its earnings for the past 12 months. The company is expected to improve its execution speed going forward and is likely to achieve a higher turnover and profit growth. However, the rich valuations capture most of this upside.