Larsen & Toubro Limited

Ladies and gentlemen, good day and welcome to the Larson & Toubro Limited Q2 FY24 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference, please signal an operator by pressing star and then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. P. Ramakrishnan, Head, Investor Relations from Larson & Toubro Limited. Thank you and over to you, sir.

All of Larson & Toubro. The next presentation was uploaded on the stock exchange at our website and our website around 7.05 p.m. I hope you had had a quick glance at the numbers. As per past practice, instead of going through the entire presentation, I will take you through the key highlights for a quarter in the next 30 minutes or so, post which we will take the question and answer. Before I begin the overview, disclaimer, the presentation that we have uploaded on the stock exchange and in our website today, including the discussions that we will have in this call, contains or may contain certain forward-looking statements, concerning our group's business prospects and profitability, which are subject to several risks and uncertainties, and the actual results could materially differ from those in such forward-looking statements. In contrast to global trends, the Indian economy in Q2-FI24 has continued to demonstrate resilience on the back of strong domestic demand. Investment activity has been buoyant, supported by continuing public capex. Strong growth was seen in steel consumption, cement production, as well as in imports and production of capital goods. Capacity utilization in the manufacturing sector is also trending up, which augurs wealth for country-level capital formation. It is heartening to note that despite the hiccups in the monsoon in Q2, the agricultural sowing momentum has been sustained and reservoir levels are fairly adequate. Finally, the September CPI index at 5.02% has come back to the RBI's comfort level of below 6% after a gap of two months. On the other hand, global economic growth is losing momentum and is slowing under the impact of tight financial conditions, protracted and enhanced geopolitical tensions, and increasing geoeconomic fragmentation. The recent conflict in the Middle East has raised concerns about potential increases in crude prices because the region, as you may know, is not only a critical supplier of energy, but a key shipping passageway as well. To summarize the macro backdrop in a simple sentence, I would say that it's continuing India's resilience amidst global turbulence. Before I get into details of the financial performance parameters, I would like to share a few important highlights for the quarter. Our group has reported the highest ever order inflow in Q2FI24 led by CapEx Tailwinds in both our projects and manufacturing segment across its primary geographies of India and GCC. The hydrocarbon business has secured twin ultra-mega orders in the Middle East this quarter. Our company now tops the list of international EPC contractors working in the MENA region in terms of value of projects under execution. Secondly, we are proud to be part of ISRO's moon mission, the Chandrayaan-3. L&T played a crucial role in the mission of manufacturing S-200 booster motor casing and umbilical systems that included ground plates and flight plates. Further, we also helped in the system integration of the launch vehicle from the Sriharikota range. The Honourable Prime Minister of India, Sri Narendra Modi, inaugurated the India International Convention and Expo Centre, also known as Yesho Bhoomi, at Dwarka New Delhi on 17th of September, and this particular convention center was constructed by Lassen and Toubro. The Honorable Chief Minister of Madhya Pradesh, Sri Shivrat Chauhan, inaugurated the 108 feet tall statue of Sri Adi Shankaracharya, known as the Statue of Oneness at Omkarai store in Madhya Pradesh, on 21st of September, again constructed by L&T in a duration of 15 months. Coming to IT and technology services business, the voluntary attrition in both our listed subsidiaries, LTI Mindtree and LTTS, has reduced both on sequential as well as way-on-way basis. Our financial services business has achieved the highest ever quarterly retail disbursements of Rs. 13,499 crore and the retail portfolio is currently at 88% of the overall book of the company. In Hyderabad Metro, the daily ridership touched an all-time high of 5.47 lakh passengers on September 23. Further, the monetization of the ride-to-commercial property was concluded during the quarter. The sale consideration for this transaction was around Rs. 1,045 crore and a gain of Rs. 512 crore has been booked in the Q2 of this financial year. Our thermal power plant at Naba recorded the highest ever PLF of 97.6% in the month of August 23, the previous high being 96.2% in May 22. In the reality business, there was a complete sell-out of around 500 apartments in Phase 1 of the Avinthya enclave in Manapakkam, Chennai, our first residential launch in the city of Chennai. Finally, the company successfully completed the first-hour buyback of 3,1250,000 equity shares at a price of Rs. 3,200 per share through the tender offer route with a total cash outflow of Rs. 12,280 crore which includes the tax on buyback and buyback-related expenses. thereby resulting in extinguishment of around 2.2% of the equity share capital of the company. I will now cover the various financial performance parameters for Q2-FI24. Q2-FI24 was a quarter of robust performance across the various financial parameters. Our group quarter inflows, revenues, and PADs is up 72%, 19%, and 45% respectively over the corresponding quarter of the previous year. Our group networking capital to revenue is at 16.7% in Q2FI24, thereby registering a sequential improvement of 30 basis points and 310 basis points on a Y-on-Y basis. Moving on to the individual performance parameters, our group order inflows for Q2 FY24 at Rs. 892 billion registered a Y&Y growth of 72%. Within that, our products and manufacturing business portfolio secured order inflows of Rs. 730 billion for Q2, thereby growing by 97% over the corresponding period of the previous year. Our Q2 order inflows in the projects and manufacturing portfolio are mainly from infrastructure and hydrocarbon segments. During the current quarter, our share of international orders in the projects and manufacturing portfolio is at 68% vis-a-vis 21% in Q2 of last year. The share of private orders within the domestic projects and manufacturing orders is at 36% for Q2 current year, vis-a-vis 29% in the corresponding quarter of the previous year. During this quarter, orders were received across diverse segments like the onshore vertical of hydrocarbons business, urban transit systems, transmission and distribution, as well as residential and commercial space. Now moving on to prospects pipeline. As of 30th September 23, we have an aggregate prospects pipeline of Rs. 8.8 trillion for the near term vis-a-vis Rs. 6.32 trillion at the same time last year. This represents an increase of 39% on Y-on-Y basis. The increase is largely due to the sharp improvement in the hydrocarbon prospects pipeline. The broad breakup of the overall prospects pipeline at the end of Q2-24 is as follows. Infrastructure constitutes Rs. 5.06 trillion vis-a-vis Rs. 4.54 trillion last year. Hydrocarbon constitutes Rs. 2.9 trillion vis-a-vis Rs. 1.13 trillion as of September 2022. Power is at Rs. 0.5 trillion vis-a-vis Rs. 0.38 trillion as of September 22. Heavy Engineering, Defence, Green Energy, EPC, all of them aggregate to around Rs. 0.26 trillion, which is largely unchanged from that of last year. Moving on to order book, our order book is at Rs. 4.5 trillion as of September 23. which is up 22% vis-a-vis September 22 last year. As our projects and manufacturing business is largely India-centric, 65% of our order book is domestic and 35% is international. Now of the international order book of Rs. 1.59 trillion, around 90% is coming from Middle East and 2% from Africa and and the remaining 7 or 8% from various countries, including Southeast Asia. It is evident that the GCC capex for both intra and hydrocarbon is on an upswing when compared to actual order inflows and order prospects as of September 23. Coming to the breakdown of the domestic order book of Rs. 2.91 trillion, which I said is 65% of the overall order book, That combination is as follows. Central government is 13%, state government 30%, PSU or state-owned enterprises comprise 37% and private sector 20%. Approximately 20% of our total order book of Rs. 4.5 trillion is funded by bilateral and multilateral funding agencies. Again, 92% of our total order book is comprising from infrastructure and energy. You may refer to the presentation slides for further details. During this quarter, that is Q2 FY24, we have deleted orders of Rs. 11 billion from the order book. As of September 23, our slow-moving orders is well below 1% of the total order book of Rs. 4.5 trillion. Now coming to revenues, our group revenues for Q2FI24 at Rs. 510 billion registered a Y&Y growth of 19%. International revenues constituted 43% of the revenues during the quarter. The strong execution momentum in the projects and manufacturing portfolio drove the overall group revenues for the quarter. In this business of projects and manufacturing, our revenues for Q2-FI24 was at Rs. 349 billion that registered a Y&Y growth of 25%. Moving on to EBITDA margin, our group level EBITDA margin without other income for Q2-FI24 is 11%, a drop of 40 basis points over Q2 of the previous year. This drop of 40 basis points is mainly due to job mix and cost pressures in the legacy EPC jobs and the project and manufacturing portfolio. The detailed breakup of the EBITDA margin business-wise is also given in the annexures to the earnings presentation. The EBITDA margin in the projects and manufacturing business for Q2-FI24 is at 7.4% vis-a-vis 8.2% in Q2-FI23. I will cover the details a little later when I talk about the performance of each of the segments. Our reported PAT for Q2FI24 at Rs. 32 billion is up 45% over Q2 of last year. This robust PAT growth is delivered on the back of substantially higher activity levels in the projects and manufacturing business and the financial services sector, improved treasury operations, and further aided by the TOD monetization in Hyderabad Metro. The group performance P&L construct, along with the reasons for major variances under the respective function heads, is provided in the earnings presentation. I will go through the same for further details. Coming to working capital, our NWC to sales ratio has improved from 19.8% in September 2022 to 16.7% in September 2023, an improvement of 310 basis points. For reference, our NWC sales ratio was 16.1% and 17% in March 2023 and June 2023, respectively. The group level collections excluding that of the financial services segment for Q2FI24 is Rs. 462 billion vis-a-vis Rs. 386 billion in Q2FI23, representing an increase of 20% on a Y-on-Y basis. Improvement in gross working capital ratio on the back of improved customer collections is flowing into the overall improvement in the NWC to sales ratio. Finally, the trailing 12-month ROE for Q2FI24 is 15.3% vis-a-vis 12.1% in Q2FI23, an improvement of 320 basis points. Improved profitability with every passing quarter along with return of capital to shareholders in the form of buyback is contributing to this improvement. As stated in the past, the focus of the group during this track plan period ending FY26 is on profitable growth in the PLM and services portfolio, emphasis on cash generation, divestment of non-core assets, normal capex and investment in existing and newer businesses, and returning surplus cash to shareholders at regular intervals in order to create value over time. Very briefly, I will now comment on the performance of each business segment before we give our final comments on our outlook for the medium term. I start with infrastructure. On order inflows, this segment secured orders of Rs. 280 billion for Q2FI24 vis-a-vis Rs. 251 billion in Q2FI23, registering a growth of 12%. During the current quarter, the orders were largely received in urban transit systems, transmission and distribution, as well as residential and commercial spaces. Our order prospects pipeline in infra is around Rs. 5.06 trillion vis-a-vis Rs. 4.54 trillion during the same time last year, representing an increase of 11%. The infra prospect pipeline of Rs. 5.06 trillion comprises of domestic prospects of Rs. 3.81 trillion and international prospects of Rs. 1.24 trillion. The sub-segment breakup of the total order prospects in this segment comprises as transportation infra having a share of 26%, water and effluent treatment at 20%, buildings and factories 18%, heavy civil infrastructure 13%, power transmission and distribution 13%, and minerals and metals at 10%. The order book for this segment is at Rs. 3.05 trillion as of September 23, and the book bill for this particular segment is around 2.5 years. Q2 revenues at Rs. 246 billion registered a strong growth of 27%, over the comparable quarter of the previous year largely aided by the strong execution momentum or progress across multiple jobs from the opening order book. Our EBITDA margin in this segment for Q2FI24 at 5.4% vis-a-vis 6.6% in the corresponding quarter of the previous year. Margin for the quarter is a function of job mix and legacy COVID jobs nearing completion in the current year. We expect these legacy jobs to conclude by the end of this financial year. If you recall, we had at the time of declaring our Q1 numbers indicated earlier that the margin recovery in this segment will be visible somewhat in Q3 and lastly from Q4 onwards. Having said that, I would also like to mention here that we have not lost hope on any customer claims which are being rigorously pursued under the terms of the respective contracts, the settlements could be happening over time. Although infra-margin has been subdued due to the impact of legacy jobs and commodity prices over the last couple of years, it is good to note that the working capital intensity in this particular space has substantially improved during the same period resulting in stable return ratios for the segment over a period of time. Moving on to the next segment, which is energy. This comprises hydrocarbons and power. The receipt of two ultra-mega international orders in the onshore vertical of this business helped order book, whereas the power business benefits from the receipt of a flue gas desulphurization order. We have a strong order prospect pipeline of Rs. 3.46 trillion for the energy segment that comprising of hydrocarbon prospects of Rs. 2.91 trillion and power prospects of Rs. 0.55 trillion. The order book for this segment is at Rs. 1.06 trillion as of September 23 with hydrocarbon order book at Rs. 1.01 trillion and the power segment at Rs. 52 billion. The Q2FI 24 revenues of energy segment at Rs. 67.9 billion registered a healthy growth of 22%, mainly driven by the pickup execution momentum in the international projects of the hydrocarbon business, whereas lower revenues in power business is reflective of a depleting order book. The energy segment margin in Q2FI24 is at 9.5% vis-a-vis 8.5% in Q2FI23. Hydrocarbon margin in Q2 is in line with the previous year, whereas a particular job crossing the margin recognition threshold enabled a bit of improvement in power segment. We will now move on to high-tech manufacturing segment that comprises the defense and heavy engineering business. The defense business benefits from the receipt of a key order whereas deferrals impacted order inflows in heavy engineering. Our order prospects pipeline for the high-tech manufacturing segment is around Rs. 231 billion. The order book for this segment is at Rs. 259 billion as of September 23rd. A healthy execution momentum across both the businesses drives a 30% revenue growth in Q2-FI24, whereas the margin de-acceleration of 360 basis points over the corresponding quarter of the previous year is largely reflective of the execution phase of jobs in the portfolio. Since we are on this segment, let me once again repeat what we have always mentioned in the past, that the defense engineering business does not manufacture any explosives nor ammunition of any kind, including cluster ammunitions or anti-personnel landmines or nuclear weapons or components for such munitions. The business also does not customize any delivery systems for such ammunitions. Moving on to the next segment, IT and TS, that comprises two listed entities, listed subsidiaries, LTI MineTree and LTTS. The revenues of this segment at Rs. 111 billion in Q2FI24 registered a modest growth of 7% largely in line with the subdued global macro conditions impacting IT spends. Despite ongoing macroeconomic concerns, the deal pipeline for this segment is healthy with good visibility across the various sub-segments. The negative variance in EBITDA margin in Q2 FY24 vis-a-vis the corresponding period of the previous year is largely attributed to increased talent acquisition retention costs partly offset by improved operational efficiency. I will not dwell too much on this segment as both the companies in this segment are listed companies and the detailed fact sheets of their performance are already available in the public domain. Next, we move on to financial services segment. Here again, L&T Finance Holdings is listed and the detailed results are available in the public domain. Q2 of the current year revolved around strong retail disbursements which was the highest ever in a quarter, lower credit costs, better asset quality and a facing down or a run down on the wholesale book. The balance sheet is strong on the back of adequate provision coverage ratios and has inbuilt macro prudential buffers as well. Financial Services achieved 88% retailization of its loan book in September 23, well ahead of the Luxia 26 targets. The retail book growth, asset quality, and the return on assets are highly satisfactory. The business is building itself on the five pillars of growth, namely enhancing customer acquisition, sharpening credit underwriting, implementing futuristic digital architecture, higher brand visibility and capability building. And finally, sufficient capital in the balance sheet is available to pursue growth in the medium term. In a way, the stage is set for L&T Finance Holdings to truly achieve FinTech at scale. Moving on to the development project segment, this business includes the power development comprising of Naba Power and Hyderabad Metro. Let me once again mention here that the profit consolidation of L&T IDPL, that is the L&T Infrastructure Development Projects at PAC level has been discontinued from Q4 of the previous year post signing of definite agreement for sale of our entire stake. The investment in the JV is now classified as held for sale in the balance sheet. The majority of revenues in the development project segment is contributed by Naba Power. The monetization of a commercial property and improved ridership helped the revenue growth in Hyderabad Metro, whereas NAVAP revenue was partly impacted by lower power demand that happened mainly in July 23. To give you some statistics on Hyderabad Metro, the average metro ridership has improved from 3.55 lakh passengers a day in Q2 FY23 to to 4.62 lakh passengers per day in Q2-FI24. Our average ridership in Q1 of the current year was 4.22 lakh passengers per day. Sequentially also, the ridership has improved. As I mentioned earlier, the ridership per day touched a record of 5.47 lakh on September 23, 2023. The higher segment margin in Q2 FY24 is primarily due to improved metro ridership as well as the TOD monetization and also due to consolidation of NABA profits. The Hyderabad metro at a pack level, we consolidated a profit of Rs. 2.4 billion in Q2 FY24 vis-a-vis a loss of Rs. 3.28 billion in Q2 of the previous year. For H1, the total loss from the metro operations was Rs. 95 crore, vis-a-vis a loss of Rs. 653 crore in H1 of the previous year. Moving on to the last segment, the residual segment, which is others. This segment comprises reality, industrial walls, construction equipment and mining machinery, rubber processing machinery, and a small residual portion of the smart world and communication business. The future revenue growth of 14% over the corresponding quarter of the previous year is mainly contributed by higher handover of residential class in the reality business. The margin improvement in this segment is again primarily contributed by better profitability in the reality business. Coming to the last part of my presentation, the outlook. India's economic growth continues to display, encouraging resilience despite the continuing global chaos. Prudent fiscal and monetary policy management from the government and RBI respectively has resulted in the partial decoupling of India growth story with the rest of the world. Encouraging real GDP growth with a stable inflation as well as manageable internal and external balances can be expected in the near to medium term. The Indian economy is expected to grow by 6.5% in FY24, primarily aided by sustained buoyancy in services, consumer and business optimism, higher government spending, healthy balance sheet of banks and corporates, upcoming festival demand, and supply chain normalization. Besides spend in basic infrastructure, a higher government capex allocation in the green economy, including clean and renewable energy, will provide the necessary impetus to investments in energy transition and larger infrastructure projects. Outside India, the headwinds from global economic slowdown and the declining global trade further complicated by the current geopolitical developments continue to pose even risks. Despite this, we remain optimistic around fresh project starts in oil and gas, core industrialization and energy transition prospects in the GCC region in the near term. The company, backed by its all-round capabilities in engineering, manufacturing, construction, project management, and services, will continue to focus on operational excellence and cost competitiveness for profitable execution of its large order book. The company will pursue its stated objective of demonstrating profitable growth with judicious use of capital and improved shareholder value on a sustained basis. I will now finally comment on our guidance for F524 before we take Q&A. On order inflows and revenue, we are indeed off to a good start in H1 the current year, both in terms of orders secured and the revenues achieved during this period. At the start of the year, we had guided a 10 to 12% order inflow growth and a 12 to 15% revenue growth for FY24. The improved performance on both these parameters so far in H1 make us believe that we will possibly outperform our yearly guidance on both these parameters. It is difficult to pinpoint a specific range of growth possibility on audit and close, especially in a pre-election year, amplified by the continuing international geopolitical volatility. Therefore, we are keeping our order inflow guidance a little open-ended. Having said that, I would also like to mention here that we do remain constructive on order inflows for the year due to a substantial jump in the international prospects in the project's portfolio for the near term. Since we are already sitting on a large order book, our execution should carry on at a healthy clip provided we are able to keep the working capital intensity under check. Here again, as you all know, this is a matter of discipline that we have never in the past pursued faster execution at the cost of compromising on the balance sheet. Therefore, our revenue guidance, like ordering flows, is also a little open-ended, with obviously the stance is that most likely we are going to outperform the guidance that we have provided at the start of this year. on these two important parameters. On margins, our progress on H1 margins in the projects and manufacturing portfolio has been along expected lines. However, it appears at this juncture that the multiple new jobs which are in ramp-up stage may not cross the valuation threshold by the end of FY24, leading to some sort of postponement of margin recognition in these jobs for the current year. Therefore, we expect margins in the projects and manufacturing portfolio in a range between 8.5% to 9% for the full year as against the initial guidance of 9%. Having said that, I would also like to mention that the slip-up in margin, if any, in this portfolio is being made more than through volume growth and improved working capital intensity thereby resulting in superior ROICs by the end of this year. Finally, we do believe that our margin trajectory in the projects and manufacturing portfolio should look up from the next financial year onwards. However, we will be guiding our investors post the close of the current financial year. On working capital, since we have been able to preserve our balance sheet gains well in H1 so far, Our guidance of 16 to 18% bank on NWS with revenue for the year FY24 remains unchanged. Thank you, ladies and gentlemen, for the patient hearing. We will now begin the question and answer.

Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles.