Order inflows for engineering conglomerate Larsen & Toubro revived in the June 2012 quarter, as infrastructure orders picked up. After a 12 per cent drop in order intake in 2011-12, new orders jumped 21 per cent in the latest June quarter.
Continued steady and on-track project execution helped the company maintain its double-digit revenue growth. But revenue growth was maintained at the cost of a slippage in operating profit margins.
Order inflows surge
L&T’s 2011-12 order inflow drop was a first in at least five years. The June 2012 quarter, thus, was a turnaround. More than half the new orders were urban infrastructure and in roads, where project activity has been especially lively in the past few months.
Power orders were quite strong, with a good number of transmission and distribution projects. What is heartening is that orders have come across quite a few segments. If such project activity continues, the infrastructure sector may see some respite from turbulent times. More than half the order inflow for L&T is from the private sector. With other infrastructure companies seeing execution and payment delays in government contracts, a heavy private sector presence gives L&T an edge within the sector.
Margins slide
Excluding other income, operating profits fell 5 per cent in the June ’12 quarter compared to the year-ago period. Input costs such as steel and cement, which have been weighing on profitability for a while now, remained high.
Material and construction costs moved up to 65 per cent as a proportion to sales, from 62 per cent in the year-ago period.
Staff costs shot up 27 per cent on L&T’s continued strategy of adding to workforce, reiterating its expectation of a strong revival in domestic and overseas project activity over the long term. Mark-to-market loss in unhedged forex spiked costs.
Operating profit margins slipped 3 percentage points to 9.1 per cent in the June ’12 quarter, the sharpest fall in at least three years. Cost pressures are unlikely to abate, and L&T may find it hard in the near term to return to the 13 per cent operating margin levels of previous years.