The Hindu Business Line : L&T delivers on growth

Larsen & Toubro has comfortably outpaced its 30-35 per cent growth expectations for 2007-08, putting to rest fears about a slowdown in the capex cycle. The company, on a consolidated basis, recorded a 43 per cent increase in its sales and 27 per cent rise in net profits (excluding exceptional gains) for the year. The quarterly numbers also reinforced this optimism.

The order book also grew at a healthy pace, at a time when many companies in the engineering space witnessed a slower order intake, L&T managed a strong 37 per cent growth in orders and the order book at over Rs 53,000 crore is likely to provide steady revenue flow over the next two years.

Margins held

While the standalone quarterly and full-year operating profit margins have expanded, the margins on consolidated operations have been flat. Net profit margins for the full year (consolidated) took a dip on the back of increased depreciation and taxes. Interest costs declined as a percentage of sales, reflecting the company’s capacity to leverage without hurting profitability.

The profit margins nevertheless provide comfort as the company has managed to withstand the steep rise in commodity prices, especially with a significant proportion of fixed price contracts in its portfolio. Hedging strategies, though they resulted in losses this year, may nevertheless be the key to providing a cushion against the galloping raw material prices, over the medium term.

Changing order

This apart, some support to margins can be expected from the changing order book profile of L&T. The company would be completing execution of legacy low-margin orders. It has capitalised on the robust business environment in high-margin businesses such as oil and gas and process industries, these now contribute over 30 per cent of order book.

On a segmental basis, financial services and development projects witnessed doubling of revenues on a small base. The latter comprising of development of infrastructure projects and operation, maintenance and toll collection for infrastructure projects, may be a key segment to watch out for, given the increasing participation of the company in urban construction projects.

New forays such as power equipments, railway coach building (the company is already into civil electrification work for railways) and shipbuilding are likely to start contributing to revenues over the next two years. While the current backlog of orders in shipping causes concern about slower order intake in future, the other two segments hold potential to contribute significantly to the revenues.