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Larsen & Toubro's June quarter results appear quite good, considering the slowdown in execution and order flows in the infrastructure space in general.
While public sector and government order flows were not gaining traction, L&T quickly sought opportunity from the private sector, with the latter accounting for as much as 62 per cent of the order inflows during the quarter. Order book at a healthy Rs 1.36 lakh crore is up 26 per cent over a year ago.
Execution
On-track project execution especially in the engineering and construction (E&C) segment helped healthy sales growth of 21 per cent in the June quarter. This said profit margins across segments took a hit. For one, the electrical and electronic segment, which never fully recovered post the 2008 slowdown, saw tepid growth in sales and a 16 per cent dip in earnings over a year ago period.
Clearly, input costs and pricing pressures prevalent across industry, (given the Chinese onslaught) continue to depress margins. The machinery and industrial products division expanded its sales by a robust 25 per cent backed by higher demand for valves and rubber processing machinery (export). However, earnings growth in this segment was in single digits and margin pressure was visible. The bread and butter E&C division too was not exempt from a dip in margins.
In all, operating profit margins for the company dipped from 11.4 per cent year ago to 10.1 per cent in the latest ended quarter. This is not entirely unexpected as the company did hint at a dip early this fiscal.
Despite these pressures, earnings grew at a respectable 12 per cent year-on-year, with other income from treasury also helping marginally.
The other point of concern, possibly short term, is order flows.
Despite a strong order book, the company's inflows expanded by a mere 4 per cent over a year ago. While order such as the Hyderabad Metro Rail and a project for Tata Steel helped tide over an otherwise tough quarter, public sector orders would be key for a strong uptick in inflows. However, L&T's recent announcement of a spate of overseas projects, especially in the oil and gas space, is a welcome sign. It could make up for delay in projects in the local arena.
L&T has also not been aggressive in the power equipment space in recent months. This too may be strategically a good move, if the delay in customer advances in the case of BHEL is a sustainable trend.
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