Construction and engineering major Larsen & Toubro (L&T) has gained nearly 10% in the past two trading sessions, thanks to better-than-expected results in the March ’10 quarter. The company reported a net profit of Rs 1,438 crore (on standalone basis), up 44% on a year-on-year basis.

Net sales during the period grew by 28% to touch Rs 13,490 crore. The numbers were well beyond the market expectations, as the company has disappointed investors in the first three quarters with flat net sales and a modest 18% Y-o-Y growth in net profit. The growth was led by the engineering & construction (ECC) division, which accounts for nearly 90% of L&T revenues.

Some help also came from electrical and electronics division which benefited from rising demand for power management and control products in the domestic market. However, the industrial valves division continues to lag due to the global slowdown in the industrial sector.

From the market point of view, the most-heartening part of the L&T performance in the fourth quarter was, however, the apparent pick-up in new order inflows.

The company received new orders worth nearly Rs 24,000 crore in the past quarter, up by 90% from the corresponding figure a year ago. With this, the cumulative order inflow during FY10 jumped to Rs 69,500 crore, up by 35% over the FY09 numbers.

L&T’s total order book has now crossed the Rs 1-lakh mark and is equivalent to nearly three times its latest
annual revenues. This provides great earning visibility to the company over the next two years and is good news for its investors. The management has guided for a similar growth in order inflows for FY11, given the continued buoyancy in its target industries of power, oil & gas and infrastructure.

Another highlight of the quarter was 110-basis-points improvement in L&T’s operating margins to a record high of 15.1%. According to the management, this was due to an effective forex hedging and a better cost control.

However, the company is non-committal on its sustainability, given the recent rise in commodity prices and the upward trajectory in interest rates.

The other threat for L&T’s operating margin is the rising competition in the domestic EPC business, with the aggressive bidding by Korean and Chinese firms.

According to L&T chairman and managing director AM Naik, the operating margin in the EPC business in India is nearly double that of the global average, which acts as a magnate for global majors. This may trigger a gradual decline in operating margin in India over the long-to-medium term.

L&T is, however, on a strong wicket, thanks to its strong brand equity among target-customers, coupled with a strong backward linkage by way of a diverse manufacturing footprint. Its manufacturing prowess will only increase, as it’s on target to commission its power equipment unit, shipyard and heavy-duty forging shop by the end of current financial year.