Companies & Sectors
Weak results of L&T highlight pressure on margins
At net profitability level, L&T was able to make up some of its lost ground due to higher other income and lower tax rate, according to Nomura Equity Research in its Quick Note
 
In its Quick Note on Larsen & Toubro’s (L&T) fourth quarter performance, Nomura Equity Research said that the company’s 4QFY13 earnings missed its as well as the street’s estimates led by weaker-than-expected sales growth as well as EBITDA margins. EBITDA in 4QFY13 came in 9% and 13% lower than estimated, respectively. However, at net profitability level, the company was able to make up some of its lost ground due to higher other income and lower tax rate. The order inflow at Rs279 billion in 4Q was much ahead of its expectations, Nomura added.
 
The order growth of +25% y-o-y in FY13 was ahead of Nomura’s expectations as well as the management’s earlier guidance but nearly 120bps (basis points) decline in E&C margins against the guidance of +/- 50bps margin given in the beginning of the year flags that order wins have come in at the cost of margins over the past few years and will continue to do so in future, according to the brokerage. “These are concerns we have been highlighting in the past. Given that nearly 75% of incremental order growth in FY14F will be coming from the international markets, we believe margins could witness more pressure going forward, as competitive intensity is significantly high in Middle East markets,” Nomura’s analysts said.
 
The L&T stock has reacted negatively on the back of the weak results. Nomura expects further negative reaction to the stock.
 
For FY14, L&T has guided for: 1) order inflow growth of 20% y-y; 2) revenue growth of 15-17% y-o-y and 3) flat E&C margins y-o-y.
 
The order inflow from international markets is expected to nearly double in FY14 from FY13 levels, i.e., from around Rs120 billion to Rs250 billion. This would mean order inflow from domestic markets is expected to grow only around 6% y-y in FY14.
 
Key numbers from L&T’s 4QFY13 results:
4QFY13 revenues at around Rs203 billion (+10%y-y) missed Nomura’s as well as the street’s expectations by 2% and 4% respectively.
Even core EBITDA margin at 12.1% in 4QFY13 missed expectations. The margins were down 180 bps y-o-y. According to Nomura, the lower margin raises concerns that incremental orders are being taken at lower margin.
Engineering & Construction (E&C) segment witnessed significant deterioration in the EBIT margin. It was down to 11.2% in 4QFY13 against 13.6% in previous year (4Q). On full year basis, margin in E&C segment noted a decline of 120 bps to 10.3%.
On the back of weak margin and revenue, core EBITDA at around Rs24.5 billion (-4% y-o-y) came in 9% & 13% lower than expectations, respectively.
Higher other income & lower tax rate boosted the net income, partially offsetting weak growth and EBITDA margins. Other income was at Rs3.74 billion (against Nomura’s expectations of Rs3.35 billion).
Tax rate in 4QFY13 was 23.8% compared to 28.4% in the previous quarter.
Recurring PAT in 4QFY13 at around Rs17.7 billion fell by 6% y-o-y while on full year basis PAT in FY13 has grown by 11% y-o-y.
The momentum in order inflow remained strong at around Rs279 billion in 4QFY13 which was higher than the brokerage’s estimates of Rs210 billion.
In FY13, total order inflow was around Rs880 billion compared to full-year FY13 management guidance of Rs800 billion-Rs840 billion. Nearly 17% of orders in FY13 came in from the international markets.
As of end-March 2013, the company’s order book stands at Rs1,530 billion after adjusting for Rs170 billion of orders which are slow moving. 
Net WC as a percentage of sales moved to 19.3% end-March 2013 from 17.9% as of March 2012.
 
 

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RTI Judgement Series: UGC asked to investigate a case of providing false information
The PIO of UGC supplied false information to the applicant which prompted the CIC to direct the secretary of UGC to investigate how false information was provided to the appellant. This is the 98th in a series of important judgements given by former Central Information Commissioner Shailesh Gandhi that can be used or quoted in an RTI application
 
The Central Information Commission (CIC) while allowing an appeal directed the secretary of the University Grants Commission (UGC) under the human resources development (HRD) ministry to probe the matter where its Public Information Officer (PIO) was found guilty of providing false information to the applicant under the Right to Information (RTI) Act.
 
While giving this judgement on 2 February 2009, Shailesh Gandhi, the then Central Information Commissioner said, “Just before the hearing, the PIO admitted that Holy Cross College was favoured with financial assistance under the 'Innovative Programme' of the UGC without receiving any proposal from the college. Thus it appears that false information was given to the appellant wilfully, perhaps to cover up an irregularity.”
 
Nagarcoil (Tamil Nadu) resident A Kalaivanan, on 4 August 2008 sought information about the approval of “Innovative Programmes” Teaching and Research in Interdisciplinary and Emerging Area—Under the Tenth Plan. Here is the information he sought under the Right to Information (RTI) Act and the reply given by the PIO...
 
1. As per the guidelines, whether the college were asked to submit the proposal through their respective university.
PIO's Reply: Yes.
 
2. Is there any college from Tamil Nadu which submitted the proposal directly to the UGC?
PIO's Reply: No, The proposal has been received from a college in the state of Tamil Nadu duly forwarded by the affiliated university.
 
3. If yes, kindly give me the list of colleges that have not submitted their proposal through the University.
PIO's Reply: N.A.
 
4. What were the actions taken on the proposals submitted directly to the UGC? (Not through the university.)
PIO's Reply: Proposals received directly from the college/institutes, not forwarded through the respective University, will not be considered for financial assistance under Innovative Programme.
 
5. Provide the copy of the decision (action) as mentioned in 4.
PIO's Reply: A copy of the guidelines of Innovative Programme is enclosed Annexure. 
 
There was no mention of first appeal filed or any order issued by the First Appellate Authority (FAA).
 
A Kalaivanan on 25 November 2008 filed his second appeal before the Commission.
 
During the hearing, it became known that the PIO on 27 January 2009 informed Kalaivanan that Holy Cross College of Nagarcoil had not submitted its proposal through the university, yet it was favoured with the financial assistance under the 'Innovative programme'.
 
Mr Gandhi, the then CIC, noted that it appears that false information was given to the appellant wilfully, perhaps to cover up an irregularity. 
 
While allowing the appeal, he then directed, the secretary of UGC to investigate how the false information came to be given to the appellant on this matter.
 
“He (the secretary of UGC) will submit a report to the Commission and also send a copy of this to the appellant before 25 February 2009. The report will identify the officer guilty for providing the false information against whom penal action under Section 20 (1) will be initiated by the Commission,” the CIC said in its order.
 
 
CENTRAL INFORMATION COMMISSION
 
Decision No. CIC /SG/A/2008/00237/1424
http://rti.india.gov.in/cic_decisions/SG-02022009-02.pdf
Appeal No. CIC/SG/A/2008/00237/
 
 
 
Appellant                 :          A Kalaivanan,
                                               Nagercoil, Tamil Nadu - 629004
 
Respondent 1          :          AK Parate, 
                                              Jt. Secretary & PIO
                                              University Grant Commission,
                                              Ministry of HRD,
                                              Bahadur Shah Zafar Marg,
                                              New Delhi - 110002
 

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Improving margins in T&D space: Flash in the pan or a structural turnaround?
Decades of under-investment, followed by a march towards building sufficient power for the nation, have created significant opportunities, although structural constraints and rising competition suggest the need to be selective
 
The share prices of Voltamp and Bharat Bijlee (transformer manufacturing companies) rallied around 20% on the back of their 4QFY13 results before giving away some gains on Tuesday. Nomura Equity Research in its report on smaller transformer companies believes the positive stock reaction was on the back of sequential improvement seen in their operating as well as net profit metrics. It seems that this has fuelled some investors’ hope about revival in performance of other large transformer manufacturers, too, specifically Crompton Greaves. The brokerage analysed the reasons for the margin improvement in these companies and found that the reasons for margin improvement are company specific for Voltamp and Bharat Bijlee.
 
For example, Voltamp has benefitted from a fall in its other expenses, in both y-o-y and q-o-q absolute amount terms, while Bharat Bijlee witnessed an absolute reduction in its staff costs both y-o-y and q-o-q. Both of these trends are company specific and possibly due to cost-control initiatives that these companies might have adopted to protect margins, states the Nomura report.
 
Despite hopes of a benefit from easing commodity prices, smaller transformer companies are yet to record any benefit in raw materials/sales as reported in their 4QFY13 results. The brokerage thinks the read-across for larger T&D companies, if any, should largely be related to RM/sales, where we do not see any improvement.
 
Moreover, revenue growth, too, on an aggregate basis for the five companies that the brokerage has analysed continues to be negative. TRIL (Transformers and Rectifiers India) is the only exception, possibly on the back of its aggressive participation in PGCIL (Power Grid India) orders last year.
 
 
Key takeaways from the 4QFY13 trend of Top 5 small transformer manufacturers
On an aggregate basis, in FY13 revenue declined by -14.5% y-o-y, higher than 7.3% decline noted in FY12 compared to the +5.2%y-y growth in FY11.
Overall EBITDA margin at 4.1% in FY13 was a new low (against 5.6% in FY12 and 5.9% in FY11). The 150bps (basis points) y-o-y decline in margins in FY13 was led by higher staff cost/sales (+50bps) and other expenses/sales (+130bps) which was partially offset by slightly lower raw material cost (-40bps).
Put together, all five companies made a net loss of Rs13 million in FY13 against a profit of Rs642 million in FY12 and profit of Rs985 million in FY11.
In 4QFY13 revenue declined at a slower rate -1.8% y-y compared to around  -19% in 3QFY13 and around -25%y-y in 2QFY13.
This improvement has largely come from a jump in revenue for Transformers and Rectifiers, as recently it has been able to win a higher share of PGCIL’s orders. Excluding Transformers and Rectifiers, revenues for the other four companies were down around 18%y-y.
Margin in 4QFY13 at 4.4% was down 370bps y-o-y and 40bps q-o-q.
The current earnings trend of transformer companies highlights that a weak macro environment continues to weigh on revenue as well as margin profile.
 
Nomura has advised ‘Reduce’ for the Crompton Greaves stock with traded price of Rs105. It added that it was estimating a recovery in growth to around 12-15% growth in FY14F and FY15F compared to around 2.5% growth in FY13F for domestic power business.
 
In 4QFY13, Nomura is looking at a 5.5% revenue growth in the domestic power segment. This compares with a 1.8% decline in revenues y-o-y reported by the five transformer companies analysed below.
 
 
The brokerage estimates EBIT margins of 10% up 210bps q-o-q but down 170bps y-o-y for Crompton Greaves’ domestic power segment in 4QFY13. In comparison, the five transformer companies have reported a margin decline of 35bps q-q and 365bps y-o-y, on an aggregate basis.
 
 
Further, Crompton Greaves’ domestic power segment contributes only 27% of overall consolidated sales and 40% of segment EBIT for the company. Thus a large part of the recovery for CRG has to be driven from its international business, which contributes 34% of overall revenues but a negative contribution at the EBIT level, states Nomura.
 

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