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.

The first question is from the line of Mohit Kumar from ICICI Securities.

Please go ahead. Good evening, sir. My first question is on the order. I think in the particular quarter, I think we have announced two orders, two mega orders. One was on 10th of October, which was a mega, and the other was ultra mega for all, ultra mega today for Middle East. But in the place list today, it seems we have classified both the orders now in Ultra Mega. Is the understanding right? And are both the orders part of Q2 or only one has been included in the order inflow?

So Mohit, both the orders, the one that was announced on 10th October and the one that was released today are all forming part of Q2 order inflow of the energy segment. And Both of them individually are ultra mega, which means it is more than 15,000 crore each.

Understood. My second question is that the domestic order booking seems like on the H1 is slow. Are you seeing some slowness in the closing of the tenders? And how do you think about H2 as the H2 in terms of closing the domestic tenders?

So I would like to state here that the prospects pipeline that we have in the domestic side is at 5.06 for, sorry, I mean, in terms of the total order prospects that we have, the domestic order prospects pipeline is quite robust in the infrastructure segment. And there are no such indications per se for us to say that whether the prospects pipeline is grind up. The only thing we have to be mindful of the fact that possibly Q4 could be a little subdued on tendering and ordering activity, assuming that we can have the general elections announcements happening around that time.

last question it seems that you have taken debt to buy back given that the large cash flow available on the balance sheet what are the need to take a short term debt so Mohit typically we run a fair bit of very proactive debt raising and investment of treasury operations

So, what you are seeing is something very optically, it is temporary. Incidentally, I wish to tell you that a major part of the debt is actually falling due in the next one year. So, there has been some amount of refinancing that has happened. I would like to emphasize that this is a sort of a temporary situation. Hopefully, by March 24, we should improve back to the March 23 level as far as debt in the standalone is concerned.

Understood, sir. Thank you, Ambassador. Thank you. Thank you. Thank you. The next question is from the line of Sumit Kishore from Access Capital. Please go ahead. Good evening, PR. Congrats on a robust performance in Q2. My first question is on the networking capital ratio, which has improved on a year-on-year basis by, you know, 300 odd basis points plus to 16.7%. When you get trading in both Q2 and H1, in your cash flow slide, they are down year on year. So, given operating profit obviously has grown in both these periods. So, could you qualitatively explain, you know, what is dialed down the operating cash flow?

Okay. So, Sumit, it is like this that when I communicated 16.7% in September 23 vis-a-vis 19.8% in September 22, I also would like to emphasize here that that the gross working capital as of September 22 was 65.9%, translating to a net working capital of 19.8%. That gross working capital as of September 23 has dropped to 57.1%. So, in effect, what we are trying to communicate here that our collections momentum across the projects and manufacturing portfolio, including other businesses as well, but largely aided by the projects and manufacturing portfolio has improved. So it's actually the gross working capital reduction which is getting more pronounced. But optically, when you talk about the cash flow statement, it is more because of the volume growth.

Okay.

But the volume growth is... you know, there in the revenue, but the operating profit margin basically declining is leading to this impact overall in OCF, is what you're trying to say.

I would like to emphasize once more that the reduction in working capital to 16.7% in September 2023 vis-a-vis 19.8% in September 2022 is largely a result of a lower or a sharper reduction improvement in the gross working capital. Having said this, the volume of growth that we have seen in the first six months is more than what is there in the six months of the previous year.

Sure. That's very clear. The second question, you know, is on the order prospects that you are seeing in the energy vertical, particularly overseas hydrocarbons. Has there been some addition to that prospect pipeline or after this mega win that you have seen, because you still seem to be, you know, a very high level on a year-on-year basis.

Yeah, so as far as hydrocarbons, the prospects pipeline that we gave in June 23 was almost at 3.47 trillion rupees. Now coming to September 23 for the near term, the prospects has come down to 2.91 after taking account whatever orders have been tendered and awarded during the Q2. Which actually means that there has been a new set of ultra mega and ultra mega order prospects into hydrocarbon segment from international. And when I say international means you can assume that it is Middle East.

And this is mainly, you know, Saudi Arabia.

At this juncture, I am not in a position to give you the breakup of the country's prospects from it, but let me tell you it is beyond Saudi as well. We have sizable prospects in Saudi and Qatar and to some extent in UAE.

Okay. Just one last clarification on the core business margin. You mentioned that there are certain customer claims that the company is reasonably confident to recover. Could you please quantify where you are reasonably confident of these claims and over what time frame do you expect?

Sumit, let me once again reiterate, when we started the year, we had given a yearly guidance of 9%. for the projects and manufacturing portfolio. And we have also clearly stated that this margin expansion of 40 basis points from 8.6 to 9, 8.6 for the FY23 margin, did not reckon any customer claims because last year when we had given the guidance and closed at 8.6 for the full year, the initial guidance for FY23 did reckon But as you know, some of these claims that we are pursuing, the amounts and the collection or the settlement of that is a little uncertain. So it won't be appropriate for me to talk about the amount and also the crystallization of such things that could happen. If it happens, that could definitely lead up to the margin improvement. So we are now talking of only the cost pressures that we had articulated in the first six months relating to the legacy jobs that will be nearing execution. I think it is more or less in line. And hopefully from Q3, Q4, we can see a margin expansion in the portfolio. And anything on customer claims that gets twisted in that particular quarter, we could see a margin uptick in those time periods as and when they get crystallized and get paid.

Okay, so those are my questions. I will get back into it. Thanks. Thank you. Thank you. The next question is from the line of Renu Bharat from IIFL Securities. Please go ahead.

Yeah, thank you for the opportunity, Pinar. The first question is on Hedra's lecture. Can you help us with certain bookkeeping details on interest depreciation and the losses excluding or the profit excluding the gain from the sale of the TOD property? Okay, so... There would be some tax implication as well.

No, no. Hyderabad metro for the near term, Renu, will not have tax implication given the fact that we have unabsorbed business losses. Okay.

So, just to give a... So, what we have... No tax implication even on the TOD asset monetization.

Yeah. So, the TOD monetization is a part of business income for the company because the company's business model is a combination of metro operations and real estate operations. So it will not have a separate tax line item in the form of CAPD gains. It has been structured as a slum sale and will attract the normal tax thing. And since we have the losses which are... Accumulated losses. So there is no tax incidence. So the 512 crore PAT which I referred to in my conversation, that is at the PBAT level itself. Having said this, to the other questions, you can assume that at the current debt levels of around 12,500 crores at high development toll, the interest cost would be around 300 crores per quarter and the depreciation around 80 crores per quarter.

Okay.

And I was talking about whatever ridership that we are looking at. In fact, in September, the average ridership is slowly touching at 5 lakh October, sorry, 5 lakh on weekdays. It's more than 5 lakh on weekdays and possibly 100,000 lower on the weekends or public holidays. So one can easily work out the traffic projections assuming a 36 rupees average ridership.

Correct. Sure. And you were expecting some last rounds of certain payments to come from the government as subsidy. Has that come through now or expected in the second half of the year?

Okay. So cumulative support in the form of soft loan from the Telangana government as of date is 900 crores. As of September, it was 750 crores. So we have received another 150 crores in the month of October. So we believe that we should be getting, the arrangement was they were to give around 3,000 crore over a period of two, two and a half years. Hopefully, I think we should see the momentum of the support coming more frequently in the current year as is evident. Till March 23, we had got 100 crores. In Q1 of the current year, we received 150. Q2, we received 500. And in October, we received another 150. So that aggregates to 900.

Got it. Secondly, on the guidance, I understand you have not or you have kept your inflow and revenue guidance open-ended, while on the margins, you have reduced it by 50 basis points. So, I'm just keen to understand this incremental revenues which you are expecting where the revenue margin determination thresholds will not be reached. Are factoring in the upper end of the numbers that you have mentioned or it is factoring in a higher growth within your open-end guidance?

Okay, so let me tell you why as far as order inflows are concerned and the current tip we are growing, of course, the H1 in terms of order inflows has been quite satisfactory. But we are mindful of the fact, although order prospects is almost 8.8 trillion, here again, we should be aware that there are event risks that pose against these kind of opportunities, either as pre-election year or pre-election period. and any other event in the Middle East, which is another major source of order prospects for us. I think we have to be mindful of this. And secondly, Renu, a large part of these order prospects now are actually going into, for L&T, an aggregate of both mega and ultra-mega kinds of prospects. So that is something we have to be mindful about because the size of a large order, a billion dollars and above, may have a slippage in terms of time. So hence, we are comfortable to give that we will be outperforming the ordering flow. Coming to the revenue part, here again, the progress in H1 has been satisfactory and we do expect the growth to happen beyond the targeted range of 12 to 15%. So when I'm talking of outperforming on the revenue side, obviously we are looking at crossing the higher end of the band that we communicated at the start of the year. Maybe in terms of landing, where are we going to have in order inflow and revenue? Possibly I think we'll be in a better position to comment when we give our QT results in the month of January.

Sorry, go ahead. The point I was trying to make is since you also mentioned that there will be an operating leverage which will also kick in, offsetting the impact from legacy. So the only point I was trying to understand is the 50 basis point reduction in the operating margin guidance that you have given. Is factoring in a 15% kind of revenue growth which is at the top end of your open-ended guidance or factoring 15-20 or higher revenue growth?

So it is factoring the revised guidance where I am talking about outperforming on revenue and In terms of how the margins will shape up, I think let us close Q3. We will be in a better position to communicate how are we going to close the year. But given the fact that what we had assumed, some of the newer jobs to get into margin recognition threshold in Q2, there has been some slippages there. And hence, we thought it is appropriate that that we could be landing anywhere between 8.5 to 9 for the full year. It is premature to communicate at this juncture whether we will be at 8.5 or 8.79, but maybe a better articulation can happen once we close Q3. But this 8.59 guidance factors volume growth as per our estimates. Perfect.

And lastly, while you did highlight about reasonably good order prospects for the power sector, I just want to understand what are the base assumptions that you have taken for order pipelines for the domestic power projects, thermal coal-based projects here? Because some of your largest customer NTPCs indicating almost 11 gigawatt kind of projects award in the next 12 to 18 months. So... Can you quantify gigawatts in gigawatt terms? What is the pipeline that you have assumed until March or May or term that you have projected?

So power, I had indicated the prospects of rupees 0.55 trillion. It factors around 4.5 gigawatts of order prospects in coal-based power plant ordering in the next six months.

Got it. Thanks much PR and team and all the best. Thank you.

Thank you. Thank you. The next question is from the line of Aditya Bhartiya from Investec. Please go ahead. Hi, good evening, sir. My first question is on the two large hydrocarbon orders that you have booked. Have there been any customer advances that you have received on those orders? And what is our internal margin expectation for orders of these sizes? Okay.

So, that's a great question, Aditya. Let me tell you, I think as far as advances are concerned, all these orders will be coming up in this current quarter. Okay. I would also wish to make a remark that most of the idle department orders that we secure, they are all fixed price contracts. Obviously, while bidding for the projects, we have taken into account the competitive intensity and also our recent performance of orders with the customers in these areas and geographies are premature for us to communicate what are the embedded margins because as being a fixed price contract, time will tell how the margins evolve over a period of time. But as far as the bidding methodology is concerned, there has been no There has been no, I would say, compromise as far as the margin trajectory is concerned.

Understood, sir. And when we look at the revenue differential between domestic and international for this quarter, actually it's been quite stark. On the domestic side, it seems that there has been some deceleration, some moderation in revenue growth because we are having something like 6.5% kind of revenue growth. So what exactly has been playing out over there and how should we think about it over the next few quarters?

Okay. So Aditya, I made a statement saying that Q2 FY24 revenues at 510 billion, it registered a Y&Y growth of 19% and international revenues constitute 43% of the revenues during the quarter. Okay. Now these are group revenues. So if I had to just summarize it, out of that 510 billion of overall revenues, infrastructure segment contributes 48%. Energy segment contributes 13%. IT and technology services obviously, as you know, comprises 22% and largely 90% of that revenue is international. Okay. So I don't think at this juncture the revenue growth I would say is – For the quarter, the domestic revenues of the projects and manufacturing segment has grown up by around 7% on a why-on-why basis. And the projects and manufacturing international revenues have actually virtually doubled. The growth is almost 92% in Q2-23-24 as compared to Q2 of last year.

Exactly my point, sir. So on the domestic poor business, there's been quite a sharp deceleration. In first quarter, we have seen almost something like 35% revenue growth. This quarter, it seems that it's been somewhere between 5% to 10%. So is there something that's really happening over there? Because in first quarter, we had spoken about very sharp pickup in execution phase, both in domestic and international, and also spoken about some labor constraints being faced in the domestic market.

So there are no supply chain constraints or labor shortages per se at a broader domestic side. But let me tell you that one of the foremost reasons for our ability to control on working capital is to have a sharp look at the progress linked to the monies that get collected. That is possibly the only reason for us to say that the domestic part of the order book is possibly growing at a slightly slower rate than what is happening in international. Everything is linked to money is collected.

Understood, sir. And over there, you are seeing some challenges versus how things had been in the last couple of quarters. Because last few quarters, we've been growing without compromising on broker capital.

So, Aditya, let me talk about as far as H2 for the domestic part of the order book is concerned, is actually one of the more seasonally more favorable quarter for project execution. So, I don't think there are any challenges as far as Q3 is concerned. But Q4, no? It's a little too early. That's one of the reasons when I keep retreating that revenue guidance we will possibly outperform because we have to be also mindful of the fact that Q4, although one of the best quarters for the overall economic momentum to peak in that quarter given the fact that the government budgets would like to be completed, the climate supports the entire execution. But Q4 can be, because of all the state elections and possible central government elections, there can be a possibility of labor movements going back to the respective constituencies for voting and campaigning and all. So a little too early, but I don't see any challenges per se to articulate why domestic growth is slowing down. It is more to do with L&T's focus on progress, collect and progress, I would say.

Understood. That's very helpful. Thank you. Thank you. The next question is from the line of Lavina Quatros from Jefferies. Please go ahead.

Yeah. Hi, Pierre. That's a good set of numbers. Just a couple of things. One is on the macro side to start off with. Any interesting trends you're seeing either on the private CapEx side in India or any sub-segment within Infra that you'd like to highlight?

So as far as India is concerned, as I mentioned in the order prospects pipeline of infrastructure segment, I did give a break up. I think what we could potentially see in the next six months or so, Lavina, would be, based on the order prospects, we do see a lot of activity coming on the railway side, which is both electrification and announcement of high-speed rail networks. Metro packages, almost some 24 odd metro packages are on the annual to get awarded. So we do see a large uptick on the transportation infra led by railway sector. As far as another major area where we are seeing a good amount of prospects is the buildings and factories sector, which is almost 18% of the total order prospects of the infrastructure segment. And in buildings and factories, I think a very positive element has been it has been a decent mix of both private sector and public sector order prospects that are coming in. As far as private sector is concerned, a lot of prospects coming on pure play residential, commercial, data centers. These are three or four important areas we are looking at. On the minerals and metals, here again, the order prospects is almost 10% of the total infrastructure order prospects, again, led by prospects coming from additional capacity expansion in the steel sector, which we expect to be getting tendered out. Of course, the awards part can be a little, it would be too early for us to comment whether the award actually would happen. But definitely I can see that the auto prospects in the infrastructure segment as far as domestic concern is a blend of both private and public led by transportation infrastructure on the public side and buildings and factories on the back of what you see a residential and commercial boom happening across the country. Almost 20 to 22% of the domestic auto prospects are infra is from the private sector space.

Thank you. And lastly, I might have missed this, sorry about this, but Saudis, how much of your order book today and just confirming Israel, how much the conflict has no impact on L&T for now?

So, the second question, answer to your second question first, we don't have any major order book exposure to Israel per se. In fact, almost negligible. As far as exposure to Saudi is concerned of the international order book, almost 84% is coming from Saudi.

Okay. Thank you.

Thank you. The next question is from the line of Aditya Mongia from Kotak Securities. Please go ahead. I agree with my two questions. I'm sorry to interrupt, sir, but the line for you is not very clear. I request you to please use the handset while you're speaking.

Aditya, I can't hear you clearly.

Is this better for you now, sir?

Yeah, better, better.

I'm sorry for that. So I had two questions. The first question that I had was on getting a better sense of the improvement in working capital and the trajectory of margins. if you kind of take away the fact that domestic has not grown well and overseas has grown very well, if you were just comparing domestic to domestic, would the change in working capital be as stark as it is appearing? And would the decline in margin be less sharp than what it is?

So, Aditya, I did not understand your question on margins, but the way I will put my answer to response to working capital is is that I did respond to a question that was earlier put across, is that improvement in networking capital is not because of having collected customer advances. Now, for example, the two recent Ultra Mega orders that we have taken in order inflow in Q2, we do expect the advances to come in Q3. Obviously, it will only add a flip to the networking capital. But the larger point I would like to emphasize here that L&T is shown an improvement in the NWC is primarily focused on a more larger focus on the gross working capital. To that extent, if you see in the cash flow statement, since the gross working capital has actually come down, but because of volume growth, the number is showing a little more additional as a cash outflow because of volume. But it also means that we have to ensure that there is no slippage on executions. All the creditors or vendor payments are actually happening at a higher level. So I would like to once again to reiterate that it is not on account of customer advances that is enabling us to show a lower working capital. It's largely due to the better control and better connection visibility that we have been seeing over the last one and a half years or two years where we have been able to bring down the overall capital intensity in the projects and manufacturing portfolio. Now having said this, of course hydrocarbons as a segment has been getting a lot of orders from the overseas side and typically the working capital intensity for international jobs is more favorable than domestic jobs. So the extent of advances that we keep getting as we get more and more orders there, will enable only the improvement to happen further from what it is today. I will get your question on margins.

I would want to believe that because the overseas mix is increasing, in revenues, that should be an added overhang on margins. So as it is a support on working capital, it's probably an overhang on margins. And I'm just trying to kind of understand whether that is what we need to, in some what, the viable pressure on margins as well.

No, no, no. I would like to emphasize here that just because a larger share of international orders, whether it is compressing margins, would be an inappropriate conclusion. I would like to once again mention, and we did this at the start of this year itself, that the first six months, the margin trajectory for the projects and manufacturing portfolio would be subdued, and we do expect the improvement to happen because a large part of the projects that we secured in both infrastructure and hydrocarbons in the later part of 2021-2022 and 2022-2023 will all get into margin recognition stage in the later part of the financial year. But I wish to emphasize that the guidance that we have given a band of 8.629 or 8.529 is primarily because what we expected some of the projects of the newer projects to get into margin recognition threshold can have a slippage in terms of timelines and hence the guidance has been given to a band now Let us see how Q3 shapes up. We will have a better visibility on how we will finally close the year. And the next year, obviously, it's a little premature. It becomes very difficult for a production manufacturing company to give a guidance beyond 12 months. So we will see that basis how we complete Q3 and Q4 of the current year. But it would be a fallacy to assume that a large part of orders coming from international orders can have an adverse impact on the margin trajectory.

Understood. The second question that I had here from the front, I'm not asking for a guidance, but given that a lot of tendering has happened and you're getting a sense of pricing, are we, is the path towards 10% EBITDA margin in core ENC becoming clearer or murkier?

So, Aditya, I think I will stay put here that we will restrict ourselves to the current year in terms of margin guidance and developments. But let me assure you that as we grow bigger, we are not compromising on any sort of bidding mechanics to anyway talk about lower margins. I think the margin subdued trajectory in the infrastructure segment for the last two years has largely been on account of the legacy jobs that were secured prior to COVID and delays in execution, cost pressures arising out of additional hold-on, site hold-on costs. And of course, the claims that we have been pursuing with our clients for these kind of costs that we have incurred is taking its own toll in terms of timelines of settlement and collection. But I would like to emphasize that we are focusing on bidding parameters. There has been no compromise as far as profitability is concerned. And this is, once again, of course, we take into account the sectoral competition to also refactor that. But I think the largest piece, whereas we may have optically come down on margins, but I think the return on capital invested for the entire segment over the last one and a half years has been actually shown an improvement.

Understood, sir. Just a clarification over here. I think you made this point that labor and the shortage of labor is having no impact and this is kind of in contrast to what we are hearing from engineering companies which are essentially saying that labor are going back to their home states because there is a lot of work. I understand renting and managing the situation is a lot better but still just kind of double checking. Is labor and the cost of labor and the ability of labor becoming a problem in any state or is it something completely under control?

So Aditya, I will tell you that in the first six months, I cannot attribute that the lower progress in domestic jobs has become because of labor shortages. It is not that way. Okay. But going forward, yes, as we get larger and larger jobs, it is becoming difficult to get the right skill set of labor, especially when you are talking of coastal roads, high speed rail networks, underground metro. The type of labor that we need to secure would be challenging, but given the fact that we work with a set of subcontractors who provide and we are possibly one of the few companies that are able to demonstrate order info so that they are in turn given opportunities, maybe our ability to accumulate or organize labor at a shorter notice is better. But having said this, it would be inappropriate for me to say there is no labor shortage issue per se. There can be state-level temporary disruptions because of shortage of labor, but it's premature for me to comment that revenue shortfall because of scarcity of labor at this juncture may not be the right answer.

Understood. Thank you, PR, a lot for the color. These are my questions. Thank you. Thank you. The next question is from the line of Puneet Gulati from HSBC. Please go ahead. Yeah, thank you and congratulations on good numbers. And sorry again to belabor on the same point here. On the margin, you said that some of the newer jobs are likely to miss the margin recognition. But if the execution pace is strong, which is visible by revenues, why would that happen?

So, Punit, let me tell you, just to, since multiple questions coming on margins. See, we have a 4.5 trillion order book. Okay. Against that, I wish to tell you, almost 60 to 62% of this order book is yet to achieve the margin recognition threshold. Okay. So, which means they have not crossed those thresholds by which we can start recognizing margins. Okay? Now, this is at the overall projects and manufacturing level. If I were to take it at the overall infrastructure segment level, against the total order book that is of infrastructure we have, almost 60% of that is yet to cross the mass-integrated mission. And in respect of hydrocarbons, order book, almost 70% of that is yet to achieve margin recognition. Now, this gives us the comfort that what we are today, the jobs that are getting closed or getting into completion, the focus is on all the jobs where we have timelines to complete. given the fact that these jobs got extended because of COVID. So the activity, relative activity on the older jobs is far more than the newer jobs. And we believe that the pace of completion of the older jobs will get over by, largely over by Q3 of the current year. And we should be seeing the newer jobs getting into a faster execution mode sometime from the start of next calendar year.

Understood. So what you are saying is basically the growth execution is driven more by older jobs and newer jobs will probably start.

It is the legacy jobs that are contributing to the growth and this has been factored while we gave the start of the year guidance that the first two to three quarters could be a little subdued given the fact that the emphasis is to complete all the legacy jobs in priority. to the newer jobs and yet without affecting the deadlines of the newer jobs as well.

Yeah, but now you are giving a guidance to better than the initial year, but margins you are cutting still.

We are only saying that given the fact that as I mentioned in response to a same question last time, that some of the projects, the newer projects that was expected to cross the margin recognition threshold In Q3, depending on the budgeted estimated progress in the first half, that is getting postponed. And hence, we thought it would be appropriate for us to say that we can be looking at a margin band of 8.5 to 9 for the current year.

Understood. And secondly, on the claims, where are we and how positive are you on getting those COVID-related claims?

The claims that have been lodged with the customers for additional cost or claims towards price variation because of the higher commodity prices, all of this are across various segments, across various customers, be it central or state government. And When it comes to an extra claim, obviously, and which is not necessarily within the terms of the contract like this COVID-related cost and all, it is taking its own time for it to be crystallized. And hence, while we are given the margin guidance for the current year, we have not factored any of these claims that will come. Hopefully, I think when they come, that should see an improvement of margins in that particular quarter. Maybe that will be a one time. But as far as the margin trajectory is concerned, the legacy jobs are peaking at the execution in the current year. The newer set of jobs will get into peak execution sometimes maybe from Q4 of the current year.

Understood. And just last, I remember last time you said even though margins are weak because working capital is good, the return on capital employed is still healthy. In the current orders that you are winning, are you factoring in maybe lower margins because the working capital management is extremely good or are you still aiming for the same higher 10% kind of margin?

So, Puneet, working capital is a behavioral matter. It is independent of the margin side. So, let's not conclude that we may be bidding for higher margins at the cost of higher working capital intensity. we are in a way more disciplined enough as an organization to ensure that we progress on jobs in line with the payments that we collect.

Okay.

Margins and capital intensity run after the project is awarded, but while the time of bidding, margins are being considered as a way taking into account the capacity that we have in that particular business and also the competitive intensity.

Correct. Understood. That's all from me. Thank you so much and all the best. Thank you. The next question is from the line of Amit Mahawar from UBS. Please go ahead. Good evening, PR, and congratulations on great momentum in orders and execution. Sir, my first question is on the Saudi Arabia strategy. L&T has been investing in last couple of quarters in that region, either to increase the addressable market of what we do there, conventional hydrocarbon or infra, and also to meet the local content requirements in the kingdom. And it seems we are not going there as a one-off presence of taking a couple of orders. It seems it's going to be a permanent high exposure with a lot of local abilities for L&D. What is the framework that we are following in that region because the competition there is no more Indian. It's a global competition we have with half a dozen global giants. So can you just write on some of the framework that we are following to manage the risk profile because the Ultra Mega category is introduced maybe because of the region itself and the way the contracts are coming. Thank you. That's my top question.

So Amit, Ultra Mega is not because of only the Saudi orders. We have been thinking about this for a long time. not only Middle East orders that is becoming the size there has been some domestic orders also where the amount is almost close than 15,000 crores and it is important for L&T to start differentiating this coming as far as the overall L&T's approach to I won't use the word specific to Saudi yes our exposure to Saudi is as I said 84% of our current international order book is from the kingdom itself And the kingdom is looking to, and it is there in the public domain, there is a spend that is happening on the energy side, which is hydrocarbons, which is the boat expansion of offshore and onshore opportunities. Then we have new city developments, and new city development complete from nothing to everything, including energy transition projects and so on and so forth. So this kingdom will continue to have a good set of opportunities for EPC contractors like us. Till now our experience with our customers, our ability to deliver projects on time has been good and inshallah we think that this will continue and we should be getting a good amount of orders from this part of Middle East. But I would also like to re-emphasize that the other prospects that we have for hydrocarbons, I did articulate that everything is not Saudi itself. It is now going beyond Saudi into other domains or other countries like Qatar or UAE. So we are, as an organization, we are mindful of what we call a separate organization to be created to pursue the opportunities there, be it a project management organization, or a procurement organization, and overall execution organization. The company is investing in talent and headcount in these geographies to cater to the improved or higher set of opportunities, be it on hydrocarbons or renewables or water or core industries as well.

Okay, fine. And the second question is more slightly longer term, taking a three-year, four-year view. What kind of direction, you know, will you take for the core revenues from the conventional EPC versus, you know, some relatively higher value-added revenue segments that will eventually start, you know, building up across high-tech or across energy transition segments? So, my point is, next two, three years, you know, the profile of business that is significantly better gross margin. will that move in the next two to three years and what can that be or we are still too early in that change.

So Amit, when we articulated in May 22 about L&T's strategic vision for the next four years ending FY26, a substantial part of that is getting into investing into talent that relates to bidding for or catering to energy transition projects be it on green energy or be it on when I say energy transition means it can be a combination of nuclear, hydro, green energy and so on. So we have factored all of those type of investments including talent. Investment need not necessarily be monetary investments. It's also important to know that we need to have a higher focus of sector specific talent to be part of the organization. So that is on. Hopefully As the EPC contracting business goes beyond normative construction opportunities to getting into larger, more boutique projects that requires a lot of engineering and technology adoption, hopefully I think the margin trajectory should be in line with these kind of opportunities as well. And that also, in a way, has been articulated in our staff plan in terms of how we are looking at improved profitability coming from a mix of these new type of projects that L&T could have in the next two to three years. Amit.

Thank you, sir, and good luck.

Thank you.

Thank you. Ladies and gentlemen, we will take that as the last question for today. I would now like to hand the conference over to Mr. P. Ramakrishnan for closing comments. Over to you, sir.

So, thank you. Thanks for everyone for attending this call. It was really a pleasure to interact with all of you. I hope all your questions have been addressed. In case if you have any follow-up questions, please feel free to contact me or my colleague Harish. We will now close the call. Thank you once more. Good luck and wishing you all the very best. Thank you.

Thank you. On behalf of Larson and Dubrow Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.