L&T sees margins under pressure

Larsen & Toubro (L&T), India’s largest engineering and construction company, was hit by government delays in clearing infrastructure projects as it missed its guidance of posting 25% revenue growth. Its revenues grew 18% for fiscal 2011 to `52,090 crore.

The company on Thursday warned that “intense competition and spiralling input costs may exert some pressure on the operating margin going forward,” even as it gave a outlook of revenue growth of 25% for this fiscal.

L&T managed to grow at a respectable pace mainly due to two factors: Slower offtake of projects in the home turf made the company to look abroad. L&T’s order inflow from abroad doubled to 10% from 5% in the previous fiscal.

Last fiscal the company won a sizeable number of infrastructure projects from private players — 52% came from private players with 26% of orders coming from government. In 2009-10, government orders accounted for 59% of the company’s total order inflow.

 “The environment of growth in the country in the last one year due to variety of reasons (including) inflation and political uncertainty decision has been slow. (Still) we have seen a 15% growth in order book,” said AM Naik, chairman of L&T. 

Nonetheless, a slowing economy could pose a challenging year for L&T.

“The growth is slowing. For 2011-12, I think the economy might grow at a slower rate of a little under 8%” said Gaurav Kapur, senior economist at Royal Bank of Scotland.

A slowing demand would hit L&T’s core business division, engineering and construction, which accounted for 86% of its revenues and grew at 14% in the last fiscal, according to analysts.

The contribution of electrical and electronics division — which Naik said is already facing pressure from competitors — to the group’s revenues fell from 7.3% in the previous fiscal to 6.4% in 2010-11. Naik brushed off media reports of company selling the business division as “speculative”, saying L&T is keeping with its earlier announcement of making it as one of the nine independent companies. 

Nonetheless, many including Shailesh Kanani, senior analyst at Angel Broking, found the company’s fourth quarter and full-year results to be “good” and called it “heartening”.

“Despite all the problems and slowing economy in the fourth quarter of the year, the company managed to grow its order book 30%. This is heartening,” said Kanani.

Investors cheered the company’s fourth quarter results, which saw net sales improving 12.8% over the three month-period last year, to Rs15,078.4 crore even as it managed to check its operating expenses at 84.8% of total revenues.

“I hope to see a 20-25 growth in my order book (Rs1,30,220 crore)” Naik said.

The order inflow of Rs79,769 crore for the fiscal 2011 was largely on improved performance in power business, headed by Ravi Uppal and which contributed to 32% of total orders and infrastructure division, which accounted for 38% of total orders.