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BL Research Bureau

Larsen & Toubro’s engineering and construction (E&C) segment was the key contributor to the robust growth in topline and earnings of the company for the quarter ended June 2008.

In the first quarter of FY 2008, L&T’s standalone net sales grew 53 per cent. Excluding forex gains booked by the company in the first quarter of FY 2007, net profits for Q1FY09 rose by 70 per cent on a YoY basis.

Operating profit margins at over 9.5 per cent was primarily supported by higher margin projects executed by the E&C division.

While L&T’s order book grew 40 per cent YoY to Rs 56,300 crore, order inflows during the quarter grew at a relatively modest 28 per cent, primarily supported by the orders won in the power sector.

Excluding the power project from Andhra Pradesh, order inflow grew less than 10 per cent.

Trend in order inflows over the next couple of quarters could be crucial to assess if L&T is likely to be impacted by any slowdown in domestic capex spending.

Belying fears of a negative impact from commodity hikes, the OPMs of the E&C division grew by a healthy 90 basis to 10.5 per cent. This is despite L&T’s exposure to fixed price contracts which do not hold any price escalation clauses. Execution of projects with superior margins appears to have lent support despite the steep raw material hikes.

L&T’s electrical and electronics division may have been impacted by the slowdown in industrial growth (as indicated by IIP numbers in 2008) as the topline of this segment grew by a mere 4 per cent.

However, L&T’s machinery and industrial products segment grew by a healthy 46 per cent, suggesting that the slowdown may not be applicable across industries. It needs to be noted that this segment has been bolstered by forex gains arising from an export sales of 26 per cent (of segment sales).

Therefore, any slowdown in this segment in the coming quarters need not come as a surprise.

The electrical and industrial products division contribute less than 20 per cent of total revenues.

Any slowdown is these segments may not have a significant impact on revenues as long as the E&C division continues its current pace of execution.

Added to this, newer segments such as power, railways and shipyards may soon start contributing to revenues over the next couple of years. Aggressive bidding in these ventures could, however, pose a risk to the profit margins in the initial phases.

Among the key subsidiaries, L&T Infotech witnessed improvement in profit margins facilitated by a depreciating rupee. However margins of L&T Finance took a hit on the back of rising interest rates.

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