Markets gave a thumbs-up to Larsen & Toubro's double-digit sales and profit growth and strong order inflows for the March quarter as well as the clarification that the company's electrical and electronic division was not going to be sold.

The stock ended Thursday's trade with a gain of 6 per cent. While net profits expanded 17 per cent for the March quarter over a year ago, sustainable profits, excluding one-time gain from sale of investment in construction equipment, was at a more sedate 12 per cent.

On the other hand, reported profit for the full year dropped by 10 per cent on account of extraordinary income in the previous year. Adjusting for this, recurring profits for FY-11 expanded a healthy 15 per cent.

Key driver

L&T's engineering segment, as always, was the key driver of revenues. The segment though struggled to hold on to operating profit margins. Some of the aggressively bid power equipment projects, which have started contributing to revenues, could be one reason for the pressure.

Given the competition in the power equipment space, with Chinese players looking at setting up local units, and the input cost hikes, the engineering and construction space could continue to see some pressure unless there is an increase in the export revenue in this division.

Exports remained flat for the March quarter compared with previous year while it declined for the full year. However, improving export order flows could provide some support in FY-12.

Props margins

The electrical and electronic segment did not fare too well in the March quarter what with a 5 per cent decline in net sales over a year ago. The segment, though adequately compensated this with strong EBITDA margins of 25 per cent (16.6 per cent year ago). Clearly, L&T has managed price hikes comfortably in this division despite sedate volumes.

However, the company could not repeat the above price hike strategy in its machinery and industrial products segment, despite robust demand as indicated in macro indicators such as the IIP.

Overall, L&T managed to maintain its EBITDA margins at a time when most other engineering companies have been reeling under pressure of input cost hikes. L&T's EBITDA margins for the quarter remained flat at 15.2 per cent in the March quarter, despite materially higher staff costs. Significant increase in the profits margins of its electrical and electronic segment appears to be the reason behind L&T maintaining profit margins.

Robust order book

The other key highlight in the quarter was L&T's order inflows, which was an impressive 27 per cent, taking the order book to Rs 1,30,000 crore – thrice net sales for FY-11. Projects from the infrastructure and power segment accounted for a chunk of the order book. L&T's Dhamra port in Orissa, a joint venture with Tata Steel would start contributing to revenues from FY-12.

L&T's finance subsidiaries cumulatively expanded profits by 61 per cent for the full year. The impressive performance may soon bring these subsidiaries to the IPO market.

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