Adjusted for one-time income, L&T's net profit for the half-year ended September has grown by 10.55 per cent. The one-time income relates to a sale of undertaking/ship and a change in the accounting method for inventory valuation. AS-2 being made mandatory has resulted in the inventory valuation being higher by Rs 18.76 crore, post-tax and Rs 30.51 crore, pre-tax. The OPM in the second quarter at 9.55 per cent (adjusted for other income and increase in the value of inventory by Rs 30.51 crore -- which is deducted from total expenditure but being one-time income has not been considered) is 4.45 percentage points lower than in the first quarter.

The adjusted PAT in the second quarter, which is normally higher than the first quarter's PAT, is Rs 23.05 crore lower. Basically, L&T owes its better financial performance to ICAI which has made adherence to AS-2 mandatory.This has to be viewed in the light of the slowdown in the order book for engineering majors and L&T's accounting policy for booking profit on the completion of a specified percentage of the contract. Though L&T has an order backlog of Rs 6,686 crore as at September 30, 1999 (Rs 6,252 crore), the impact on the bottomline will be reflected only in the second half of the next year.

The silver lining, however, is the performance of the cement division. Driven by a 17 per cent reduction in direct costs and 5 per cent higher net cement realisation (NCR), the operating margin of the division has improved from 6 per cent to 19 per cent. Yet, the contribution of the division to the bottomline is tax cover. Post interest and depreciation but before tax advantages, the division is still making loss.

In 1997-98 and 1998-99, L&T added 6 mt cement capacity (4 mt in Gujarat and 2 in AP). According to the management, the interest for the first half of the current year (Rs 181.77 crore compared to Rs 70.33 crore) is up due to the commencement of commercial production at Tadpatri (October 1998) and the captive power plant at Awarpur in Maharastra (46mw-coal fired). In the second half of the year, the 52mw naphtha-fired CPP at Gujarat is expected to be fully commissioned. This will lower operational costs at Gujarat substantially as the state has the highest tariff but will also push up interest and depreciation cost along with tax cover.

The better part is that as on March 1999, purchased power accounted for 73 per cent of the power cost. In 1999-2000, even assuming the captive to grid power ratio of 80:20 and the cost per unit to be Rs 2 and 4.1, at 100 per cent utilisation and 98 units per tonne, the addition to OPM will be 8 percentage points (assuming no material decline in prices in H2).

The cement division should end the year with OPM of 25-27 per cent. Another good point is that refineries are redesigning fuel catalytic converters and shifting from heavy to light and middle distillates.

Like DHDS projects, the order implementation period will be short and one order will result in all the other orders and order size will be significant.Though the OPM in switchgear division has declined from 18 per cent in 1998-99 to 8 per cent in the first hal of the current year, its contribution to the topline is insignificant.

The company's future prospects are excellent and stock-holders could hope to make significant gains.

Wipro

Wipro's financial results for the quarter ended September, confirm that concerns regarding the profitability of its software and services division may not be misplaced. For the second quarter in the running, the division has reported lower operating margins (profit before interest and tax as a percentage of total revenues) on a year-on-year basis.

For the quarter ended June, operating margins had declined by almost 6 percentage points to 24.95 per cent. The trend has continued for the quarter ended September and operating margins are down by half a percentage point to 26.89 per cent.

However, what is heartening is that on a quarter-to-quarter basis, profitability has improved and for the six-months ended September, the company achieved operating margins of 26 per cent - 3 percentage points lower than the previous year's figure.

A comparison of the division's performance, during the quarter ended September, with companies like Infosys Technologies, Satyam Computers and Pentafour Software further justifies the concerns regarding its profitability. Infosys recorded a 6 percentage-point improvement in operating margins to an impressive 34.52 per cent.

Satyam and Pentafour have also clocked higher operating margins than Wipro's software & services division at 26.93 per cent and 30 .18 per cent, respectively.

The improvement in Wipro's overall profitability during the quarter can clearly be attributed the performance of its systems & services and consumer care & lighting divisions.

The systems & services division, which made a negative contribution to overall profits in the first half of the previous year, has achieved an operating margin of 3.24 per cent in the six months ended September.

Since this division has contributed over 35 per cent of overall revenues, the turnaround in its fortunes has had a positive impact on the company's profitability for the period. Net margins have improved by almost 4 percentage points to 12.08 per cent. The consumer care and lighting division has continued to perform well during the quarter despite the continued fall in vanaspati prices during the quarter.

Although revenues fell by about 22 per cent, profits were unaffected and operating margins went up by over 3 percentage points to 15.82 per cent. Superior performance of the personal care products and lighting systems & solutions appear to have saved the day for the division.

Going by the results of the first two quarters, it is evident that although the software & services division would continue to drive topline growth, it is the systems & services and consumer care & lighting divisions that will drive its profitability for the year.

With contributions from Urmik Chhaya & Sarad Saraf