Insight: Spending curbs bode ill for L&T

A company generally talks of a bonus issue when it has either posted solid numbers or is expecting scorching growth, going forward. But none of these justify the bonus issue announced by L&T in its March quarterly results. Going by that logic, the June 2013 numbers don’t even call for it.

L&T announced a 12% drop in its net profit at `756.03 crore compared with market expectations of `950 crore. A 22% plunge in other income partly explains this mismatch. This was also on account of lower dividends and interest earnings.

There is little in the numbers that inspires confidence. Its sales have grown by a mere 5% while its operating profit margin has fallen by 0.6%. Lower margin was on account of higher employee costs, higher sub-contracting charges and the nature of product mix. In terms of order book, inflows went up 28% in the June quarter while its aggregate order book rose 8%.

L&T’s results can be termed as a proxy for Indian economy, given the size of the company and its scope of operations. Orders to tune of `500-600 crore have been cancelled. Working capital is getting stretched. As a result, the company is borrowing through high-cost debt.

In order to tide over domestic troubles, the company is focusing on global markets. It maintains its growth guidance of 15-17%, thanks largely to visibility in international markets.

The weak outlook and further slowdown expected in domestic orders, especially in the public space given the election-related curbs ahead, mean that the stock price can correct some more.