INSIGHT: An order-ly rise

Larsen & Toubro, the Rs 17,500 crore engineering and construction major, reported lower-than-expected revenues for the quarter ended March 2006. Analysts polled by Bloomberg had estimated that revenues would grow 23% to Rs 5,260 crore last quarter, but the company reported operating revenues of Rs 4,628 crore, a growth of only 8.2% over the previous year’s March quarter. Besides, order-booking slowed down last quarter, after growing at brisk pace in the preceding three quarters. Order booking inched up to Rs 5,442 crore last quarter, from Rs 5,302 crore in the year-ago March quarter. In comparison, orders had risen by 84% in the first three quarters.

The markets, however, weren’t too bothered about these factors. Net profit before exceptionals grew by 37.5% to Rs 459 crore last quarter, higher than the profit of Rs 427 crore analysts had predicted. L&T’s stock price rose by about 1% as a result. Another reason for the buoyancy in L&T’s stock price is the strong order backlog. As on March 31, 2006, the company’s engineering and construction division’s order book position stood at Rs 24,169 crore, 1.8 times annual revenues of that division. On an average, these orders are executable over an 18-month period. L&T expects order booking to grow by about 30% this year, meaning revenue outlook is good for a few more years.

L&T’s non-E&C businesses have also been doing well. These businesses, which include the manufacture of electrical and electronic products, financial services and software development, accounted for 39% of incremental revenues last year, and 50% of incremental profit. With the E&C division also sitting on a strong order book, L&T seems to be firing on all cylinders. This is reflected in the company’s stock price, which has more than doubled in the past one year. What’s also reflected in L&T’s share price is the value of its many subsidiaries. According to a recent Citigroup report, the value of L&T’s stake in its major subsidiaries amounts to Rs 474 per L&T share. Adjusted for this, L&T’s core business is valued at Rs 1,817 per share, or 23.8 times trailing earnings.

While the business outlook is strong for the near-term, current valuations look aggressive since they imply that the trend would continue for a longer time-period.

Engineering growth

Thermax shares rose smartly by 4.3% on Thursday, thanks to the impressive results for the year-ended March 2006. The company reported 28% growth in consolidated revenues. Operating profit rose at an even higher rate of 69% to Rs 176 crore, thanks to a 261 basis points improvement in operating profit margin.

The company’s stand-alone results are not comparable since last year’s results include the numbers of Thermax Babcock & Wilcox Limited and Thermax Capital Ltd, which was amalgamated with the company effective April 2005. But it’s interesting to note the company’s consolidated profit of Rs 102 crore was far short of its stand-alone net profit of Rs 123 crore. This, according to analysts, is on account of subsidiary company, ME Engineering, which reported a loss of Rs 20.7 crore last year.

Despite this, consolidated net profit grew at an impressive rate of 50% last year. This is expected to continue this year due to a robust order backlog, which increased 57% to Rs 1,730 crore. The position at the end of the December quarter was Rs 1551 crore, which means growth in order book continues to be strong.

Orderbook strength also means the company expects revenues to grow by 30% this year. Analysts foresee earnings to grow by double that rate thanks to further margin expansion. Thermax’s current P-E valuation also factors in strong growth going ahead. In fact, at 37 times trailing earnings, earnings growth is expected to be high for quite a few years ahead. The valuations make the Thermax stock more vulnerable to any correction in the markets.