Engineering gains

INSIGHT

Larsen & Toubro’s (L&T) standalone net sales rose 12% to Rs 4,118.4 crore for quarter ended December 2006 (Q3). Overall, order inflows rose 30% to Rs 9,498 crore; order backlog stood at Rs 35,710 crore.

Operating margins improved sharply to 13% from 8.5% in Q3 last year; operating profit jumped 76% to Rs 554 crore in Q3. L&T was able to keep a tab on costs of goods sold (raw material, sub-contracting, etc; 75% of sales), which grew just 6.1% to Rs 3,090 crore. Some of this was offset by a 29% rise in staff expenses to Rs 302.8 crore, led by a 23% rise in manpower strength, wage hikes and ESOP expenses. Thereafter, interest cost declined by Rs 21 crore and other income jumped 175% to Rs 124.2 crore. Although tax outgo rose 122% to Rs 172.7%, profit after tax (before extra-ordinary items) rose 84% to Rs 343.9 crore in Q3.

L&T's biggest business viz. Engineering & Construction (E&C; 74% of revenues) saw margins improve 380 basis points to 11.4% led by better selection of project and improvement in contract execution. Although E&C revenues inched up by 6% to Rs 3,036 crore, order inflows were up 26% to Rs 8,172 crore over Q3 last year (significantly higher than Rs 4,631 crore for Q2 2006-07). During Q3, L&T received the big-Rs 5,400 crore order from Delhi Airport.

Other segments did reasonably well in terms of revenue growth. The Electrical & Electronics (E&E) business recorded a 30% rise in revenues to Rs 442 crore led by strong sales of standard electrical products, though margins fell 120 basis points to 17%. Machinery & Industrial (M&I) business too recorded a 17% growth in revenues to Rs 400 crore; margins fell 180 basis points 14.3%. Likewise, 'Other Revenues' (ready-mix concrete, etc) jumped 46% to Rs 243 crore; margins dipped 50 basis points to 4.9%. Clearly, the margin improvement in E&C has more than offset the slip in margins of other segments.

On consolidated basis, L&T's revenues increased 21% to Rs 5,183 crore, operating profit jumped 76% to Rs 795 crore and net profit (excluding gains on divestitures) was up 90% to Rs 500 crore for Q3. Thus, indicating that its subsidiaries too have done well. L&T's future prospects continue to be good. At Rs 1,614, trading at a PE of 20.7 its estimated EPS of Rs 78 for 2007-08 and is capable of delivering good returns.

Along expectations

For the quarter ended December 2006 (Q3), Tata Steel’s standalone net sales at Rs 4,470 crore, operating profit at Rs 1,783.6 crore and net profit at Rs 1,063.8 crore, are up 20.9%, 28.1% and 41.1%, respectively over Q3 last year.

Sales growth was aided by an 11.5% rise in volumes to 1.23 million tonnes and 8.43% increase in average price realisations to Rs 36,211.7 per tonne. This along with a lower growth of 16.5% in total expenditure at Rs 2,686.4 crore pushed operating margins higher by 225 basis points to 39.9%.

The only eye-catching cost centre was cost of goods sold (raw material and purchase of goods), which in absolute terms increased 25.2% to Rs 863.5 crore. Here, the per-tonne cost increased by 12.33% to Rs 6,995, which seems to be driven by higher input (coke and zinc) prices. The per-tonne expenses of all other cost centres grew at a slower pace; freight and staff costs actually declined by 2.07% and 3.61%, respectively.

On segment front, steel business reported a 630 basis point improvement in margins to 37.1% (profit up 45% to Rs 1,474.6 crore), which was somewhat offset by a decline in margin of smaller businesses viz. Ferro Alloy and Others; combined profit fell by Rs 14.1 crore to Rs 144.7 crore; sales grew 27.4% to Rs 740.2 crore. On consolidated basis, net sales grew 18.9% to Rs 5,971.15 crore, operating profit by 26.6% to Rs 1,890.5 crore and net profit by 27.3% to Rs 1,054.7 crore. The combined subsidiaries' sales grew by 13.2% to Rs 1,501.2 crore, while operating margins (of subsidiaries) fell 51 basis points to 7.12%.

This along with higher interest outgo (by Rs 44 crore) and decline in other income impacted profitability. Against a profit of Rs 74.8 crore in Q3 last year, subsidiaries (combined) reported a loss of Rs 9.1 crore in Q3.

Going forward, Tata Steel's prospects look good. At Rs 519.30, the stock trades at a PE of 7.4 times estimated EPS of Rs 70 for 2006-07 and, can deliver decent returns.