Search the Internet          Tips  Sites: Finance, Investment

Cement, EPC drive L&T's net up 76%

NetScribes/Pallavi Rao

The good prices that cement companies have been getting for the commodity of late coupled with EPC contracts have helped construction major Larsen & Toubro (L&T) to notch a 76.13 per cent growth in net profit, which vaulted to Rs 332.9 million, for the quarter ended December 2000. It outpaced the year ago figure of Rs 193.4 million.

Low prices led to L&T's net profit, for the six months ended September 2000, plunging to a pathetic Rs 333.7 million this year from last year's Rs 1.7 billion. It is thus clear that cement prices have played a critical role in the fortunes of the company. As a matter of fact sources point out that cement has undermined the gains made by the EPC division during April-September 2000.

The concerted effort made by cement companies - including L&T - to raise prices in the third quarter has reflected in their balance sheets. L&T's cement sales for the third quarter were 2.7 million tonnes. The average sales realisation per tonne rose by Rs 23. This worked out to a hefty Rs 60 million more in revenues for the third quarter over the year ago period.

Thus, L&T's net profit also rose by Rs 19.2 million over the first six months' figure of Rs 313.7 million.

Analysts agree that cement has led to the recovery in the third quarter. "More than 60 per cent of L&T's incremental profit is because of cement. If the price realisation continues at this level, we can expect a good fourth quarter as well," said S. Ramnath an analyst with TAIB Securities.

Jitendra Sriram, analyst with HSBC Securities, also concurs on this point. "The good margins obtained in the cement division have contributed to operating profits." He too expects a good fourth quarter largely driven by cement.

But Ravi Shenoy of Pranav Securities, says that the performance by the cement division could have been better. "The Gujarat and Rajasthan droughts have affected L&T's cement business. Gujarat is one of the major markets for the company."

It must be remembered that though business from cement has risen, it is not as if the division is making profits. In reality, with cement performing well in the third quarter losses of the division have gone down drastically, say analysts.

"The cement division losses have decreased and realisation has increased marginally," said analyst with Inquire Indian Equities, Manish Saxena.

Besides cement, L&T's engineering, procurement and the construction division also played a stellar role in the net profit rise. "A lot of EPC contracts, scheduled to get over in the first half, were completed in the third quarter. EPC has contributed a lot to revenues," said Saxena.

Though figures for the third quarter were not available, the EPC division notched a turnover of Rs 30.7 billion for the nine months ending December 2000. This accounts for 58 per cent of total turnover for the period, a rise of 20 per cent over the year ago period.

But interest costs during the last nine months of 2000 proved to be a cause for worry. Net interest costs rose 31.6 per cent to Rs 1.2 billion over the year ago period. "Interest costs have been particularly high due to commissioning of various plants and grinding facilities," said HSBC Securities's Sriram.

Higher capitalisation of interest on borrowed funds led to the high interest costs, say analysts. "Interest costs have shot up due to capitalisation in the last quarter. The amount of interest earned was also low," said Shenoy.

"Interest costs and depreciation are bound to remain high, since the company is on an expansion spree of its cement division," said TAIB Securities's Ramnath.

L&T future prospects seem promising. With cement prices looking upbeat, the division will continue to rake in the revenues. Also, the EPC division has an order back log of Rs 81.63 billion, which will ensure revenue for the next six months. The company estimates an order book growth of 40 per cent for the full year over last year.

Money

Market Impact

Tell us what you think of this report