Larsen & Toubro warns on revenues after profit beats street

Larsen & Toubro (L&T) on Monday warned it might miss the 25% sales growth guidance given at the start of the current fiscal because of government delays in clearing infrastructure projects.

India’s largest engineering & construction company said third-quarter revenues jumped 40%, but operating margin contracted by 160 basis points to 10.8% from the year-ago period.

Net profit improved 11% from the year-ago-period to Rs841 crore, beating analyst estimates on account of faster execution of existing projects.

The company said projects over Rs50,000 crore have been deferred in the nine months to December at the government’s end.
As a result, order inflows declined 25% to Rs13,366 crore by the end of December last against Rs17,793 crore in the same period of 2009.

“Decision-making in certain ministries is taking longer-than expected … a lot of projects are getting deferred,” chief financial officer Y M Deosthalee said at a press conference.

“A lot of orders will be decided in March. March is a very critical period. We are hopeful we should be able to win some of those jobs and maintain our earlier guidance. But if there is a slippage and the projects get deferred to the next quarter, we may grow, conservatively, at 14-15%,” Deosthalee said.

Shares of L&T ended 1.65% down at Rs1,681.15 on the Bombay Stock Exchange.

Operating margins in the December quarter were hurt by rising commodity prices, a problem plaguing firms across the sectors — from car makers to capital goods companies, all have been hit by rising prices of base metals, steel and crude oil.

L&T’s results come after the Index of Industrial Production data released last week showed manufacturing growth plunged to an 18-month low of 2.7% in November against the 10.8% clocked in October.

Industrial output had grown at a robust 11.3% in November 2009.
Spiralling food prices have further strengthened expectations that the Reserve Bank of India will lift lending rates later this month to tame inflation, thereby making economists worried about first quarter beginning April 2011.

This might not bode well for firms like L&T, which to many is a proxy of sorts for the broader economy because of its role as the biggest supplier of industrial equipment and services.

“I don’t have a worry with this quarter. I expect the economy to end at 8.5-8.75% growth for 2010, coming on the back of good monsoons and improved agricultural output,” said Gaurav Kapur, senior economist at Royal Bank of Scotland.

“But I am worried about going in the first quarter of next year,” said Kapur, adding that with prices along with high interest rates could make things difficult.