Shares of engineering giant Larsen & Toubro took a massive 6.84% beating on the markets on Thursday, as it released its results with a 6% drop in revenues in the quarter ended December 2009. The reported numbers of Rs 8071.37 crore of revenues were much lower than the consensus estimates of Rs 10,000 crore.
However, the net profit at Rs 758.82 crore was higher than the estimate of Rs 709 crore. But the market was scathing in declaring its verdict, as the company has lowered its revenue guidance from a 15% growth for the financial year 2009-10 to 10%.
Earlier, the management had guided for a 15 to 20% growth and this had created a premium positioning for the company. With the guidance being ?up to? 10% there will be some amount of rerating downwards, reckon analysts. The company saw lower revenues thanks to the slowing of execution of orders. Analysts reckon the book to bill ratio, which measures actual revenues generated from orders, to be in the range of around two times. This is lower than the 4.2 times recorded by BHEL, its rival. And this is seen as a cause of concern for the blue-chip. Overall, revenues from its engineering and construction businesses, that account for more than 80% of its revenues fell by 8.75% and the profitability from the business by 50 basis points. The company is banking on the power sector and these projects have a long gestation period of 54 months. Accounting practices allow margins to be accounted for only after 25% project completion. As a result, the company will witness significant growth in the next financial year onwards. The engineering major will also see the book-to-bill ratio increase.
However, at the moment the concern is about the ability of the management to meet the annual guidance. According to calculations, the company will have to generate revenues to the tune of Rs 13,000 crore in the last quarter, representing a more than 15% sequential revenue growth. Around Rs 1,000 crore are expected to be collected as a spill over from the order postponement in the December quarter. Analysts will therefore be looking out for extremely strong execution in the last quarter.