L&T’s sales grows by only 5.8%; tail effect of the economic slowdown

Larsen & Toubro’s performance in the September 2009 quarter is a reflection of the slowdown in capital expenditure in the past. Engineering companies’s revenues fluctuate across quarters, since their revenues are booked depending on the stage of project completion. But expenses will be booked as they are incurred.

Thus, in some quarters revenues and profits may be higher and in others expenses will be higher. Since there is a transition stage, exiting a period when orders had slowed down to one where orders have begun to flow again, this volatility will be a bit exaggerated.

L&T’s gross sales increased by 5.8% to Rs 7936 crore, after adjusting for the Rs 275 crore sales from the readymade concrete business in the September 2008 quarter. This business was sold in October 2008. Its order book as of September 2009 has jumped by 30% over the previous corresponding period, to Rs 81,623 crore. Order inflow during the quarter grew by 47% to Rs 18,365 crore.

Results Highlights
* L&T’s sales grew by 2.4% to Rs 7,866 crore, partly due to the disposal of the RMC business, but also due to a decline in its electrical & electronics division and the machinery and industrial products’ business. The company has blamed on delays in order execution in some infrastructure projects and lower demand for products in its other divisions.
* Its operating profit margin has jumped from 9.2% to 10.6%. The improvement is mainly due to lower costs, especially of construction materials and traded goods. It has also slashed other manufacturing expenses and sales and administration costs. Most companies have used this downturn to weed costs out of the system, which will benefit them when sales growth recovers.
* While L&T’s operating profit increased by 17.6%, its net profit would have risen by a much lower rate. That’s because depreciation has increased by 37% to Rs 100 crore and interest costs have risen by 61%. However, a sharp increase in other income of about 64% to Rs 218 crore offset these hikes, and its net profit grew by 26% to Rs 580 crore. An exceptional gain of Rs 27.4 crore during the quarter also added to profits.

The stock markets initial reaction to the results is one of disappointment; with the share price down by 3.2% at 1.30pm.

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