L&T’s ‘Power’less Q1FY14 Performance

India’s largest engineering company L&T recently announced its June 2013 quarter results. The financial performance of the company was quite disappointing with a marginal improvement on the topline front and witnessing decline in the bottomline. The topline is up by 5%, while the bottomline declined by 12%.However, there was some relief on the order book front as the order inflow increased by 28% on a YoY basis up to Rs 1,65,393 crore, showing an increase of 8%.

The consolidated topline for the June 2013 quarter stood at Rs 12,555.06 crore as against Rs 11955.35 crore in the June 2012 quarter, while the bottomline for the quarter declined to Rs 1088.52 crore as against Rs 8636.50 crore correspondingly.Even the EBITDA margins for the June 2013 quarter witnessed decline and stood at 8.50% against 9.10% last year. However, the management has stated that the quarterly margins differ for every quarter as the project completion cycle is different and hence it is difficult to capture the EBITDA movement every quarter. Though we agree with the management’s comment, we still believe that there would be some amount of pressure on the margins on a yearly basis.

As regards the segment performance, the infrastructure segment helped the company sustain its revenue growth. It achieved the customer revenue of Rs 5127 crore (YoY growth of 23%). However, on account of margin pressures, the EBITDA increased marginally to Rs 537.88 crore. The order book for the segment stood at Rs 1,10,323 crore.

While the infrastructure segment gave a good performance, the power segment actually impacted the overall performance. The order inflow has been slower in the power segment. For the June 2013 quarter, the power segment could generate revenues of Rs 1275 crore (a decline of 44% on a YoY basis). The order book for the power segment stood at Rs 16,899 crore.

The Hydrocarbon segment witnessed some amount of traction as it generated customer revenues of Rs 2776 crore (YoY growth of 24%). The new order booking stood at Rs 2799 crore, taking it to Rs 10078 crore as on June 30, 2013. The performance of the metallurgical & material handling was also disappointing for the quarter.

As regards the poor performance of certain segments, the management has stated that under-utilisation of certain capacities has been the prime reason behind this. The capacity was built considering India’s GDP growth at 8-9%. However, slower growth has impacted the overall sentiments. The company could have generated another 30% additional revenues by using additional capacities.

Apart from this, the company witnessed a forex loss of around Rs 200 crore. The management has also stated that it has a loan book of Rs 11,500 crore of which Rs 8500 crore are in foreign currency. The management is quite cautious of this as the rupee has been quite volatile.

We are of the opinion that the performance of the company has been lower than street estimates and it is no wonder that the stock has witnessed a severe beating on the bourses. We, however, feel that the fall in the scrip makes it a good value buy and hence one can accumulate the scrip with a horizon of more than 12-18 months.