An Indian conglomerate, Larsen & Toubro or L&T as it is popularly recognized as had a mixed performance for the first quarter ended 30th June 2008. Mixed because, YoY, though it has shown an overall improvement in absolute terms, the OPM has shown a decline due to mounting expenses. But on a QoQ basis, there has been an overall decline and this has been due to the fall in revenue of all its three divisions - Engineering & Construction (E&C), Electrical & Electronics and Machinery & Industrial Products. It also has an “others” division which comprises of ready mix concrete, (which has been divested in favour of Lafarge) property development, e-engineering services & embedded systems.
Yet, the sheer brand name of L&T is enough to convince anyone about the trying times giving the company a tough time and it continues to remain extremely strong, one of the most respected companies. In today’s time, when borrowing funds has become a big issue, L&T continues to borrow funds at very competitive rates. This ability to generate liquidity even in todays turbulent times, is a big positive. And it is precisely this brand name which has helped L&T retain a very high pricing power, despite the rising costs and slowdown. It has been able to protect over 70% of its orders with price escalation clauses.
Almost every other day we read about L&T having secured a new order and it has become so routine that we take it for granted. At the end of 30th June 2008, it had a massive order book of about Rs 58,000 crore, which is twice its consolidated sales for FY08. Slowdown? What could that be for L&T?
The E&C division continues to remain its biggest earner and is expected to maintain its growth this fiscal too. L&T is also developing parallel income units such as power, railways and shipyards and these will soon start contributing to the topline of the company , thereby covering up for slowdown in the other segments.
The outlook of L&T for the current fiscal remains very robust and it is expected to sustain the present profitability’s, if not surpass it. It has earmarked a capex of Rs.2000 crore this fiscal and is also additionally looking at investing around Rs.2,500 crore in new ventures through its subsidiaries. It plans to continue to focus on China as a market and as a manufacturing base.
L&T is also looking at playing a major role in India’s endeavor to raise the nuclear power capacity. It has been a major supplier of critical equipments and systems for the various nuclear reactors. It is exploring options of forging new ties with Nuclear Power Corporation of India Ltd (NPCIL). It also plans to spend Rs.11.50 crore in building the brand equity of L&T this fiscal.
L&T is a huge company and the sheer size and reputation will help it tide over the current slowdown. Infact in tough times, it is only the strong which will forge ahead. At the current levels, L&T is a good buy, with a 2-3 years perspective.
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