Larsen & Toubro Limited

Ladies and gentlemen, good day and welcome to the Lassen & Toubro Limited Q3 FY24 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode. 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 touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. P. Ramakrishnan, Head, Investor Relations from Larsen & Toubro Limited. Thank you. And over to you, sir.

Thank you, Darwin. Good evening, ladies and gentlemen. A very warm welcome to all of you into the Q3 FI24 earnings call of Larsen & Toubro. The earnings presentation was uploaded on the Stock Exchange and in our website around 6.35 p.m. today evening. As usual, instead of going through the entire presentation, I will walk you through the key highlights for the quarter in the next half an hour or so, post which we will take question and answers. Before I begin the overview, the usual disclaimer. The presentation which we have uploaded on the Stock Exchange and our website today, including the discussions that we will be having in this call, contains or may contain certain forward-looking statements concerning our 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 Q3 of 2024 has continued to present a picture of resilience and momentum. The investment activity remains healthy on the back of continuing public capex. Consumption spends have received some boost from the festival season in Q3. Better capacity utilization in the manufacturing sector, strong real estate demand, healthy credit momentum, higher tax collections, and an acceptable level of inflation all are aiding the growth prospects of the Indian economy. The fundamentals of the Indian economy remain solid with healthier corporate and bank balance sheets, fiscal consolidation is on course, external balances remaining manageable, and forex reserves providing cushion against any possible external shocks. These factors combined with consumer and business optimism create congenial conditions for the sustained growth of the Indian economy going forward as well. Before I get into details of the financial performance parameters, I would like to share some important highlights for the quarter. We are happy to report that our nine-month order inflows at a group level for FY24 at rupees 2.31 trillion has already crossed the last full year FY23 levels, largely on the back of large order wins in infrastructure revolving around renewable EPC and associated utilities in the Middle East, urban mobility packages in India, as well as onshore and offshore international winds in hydrocarbon business. Secondly, the India's longest sea bridge connecting the Indian city of Mumbai with the satellite city of Mumbai, and named the Sri Atal Bihari Vajpayee Trans-Arbor Link or Atal Setu was inaugurated on the 12th of January 2024. Our company was one of the major EPC contractors involved in this prestigious project. On January 22nd, 2024, the Honourable Prime Minister of India led the consecration ceremony of the Sri Ram Janmabhoomi Mandir in Ayodhya. We are pleased to inform you that this temple is also being constructed by Larsen and Dubrow. Our hydrocarbon business has performed exceptionally well during the year. The nine-month order inflow for this business at Rs. 582 billion is a record high. Consequently, the order book for this business has expanded to Rs. 1.07 trillion as of December 23rd. Coming to the IT and technology services portfolio, the voluntary attrition in both our listed entities, LTI, Mindtree, and LTTS, has reduced both on sequential and way-on-way basis. Our financial services business has achieved the highest ever quarterly retail disbursements of Rs. 149 billion, and the retail portfolio today is at 91% of the overall book which stands at Rs. 818 billion. Hyderabad Metro received financial support of Rs. 150 crore from the Government of Kalingana during Q3. The cumulative amount received under this facility till December 23 stands at Rs. 900 crore. Some other important highlights during the quarter are we manufacture the first electrolyzer of 1 megawatt in the Hazira factory on December 13, 2023. On the green energy side, L&T Electrolyzers Limited emerged as a successful bidder with an allotted capacity of 63 megawatt under the Tranche 1 of the PLI scheme for electrolyzer manufacturing launched by the Ministry of New and Renewable Energy. The data center at Panvel, a pilot project by L&T, has gone live with a capacity of 1.4 megawatt in the Mumbai region. Furthermore, there is an upcoming data center closer to commissioning of almost 12 megawatt in Chennai, expected to be completed in Q4 FY24. As mentioned in our previous conversations, L&T plans to have an aggregate capacity of around 60 megawatts, in the data center domain over the next couple of years. Finally, we incorporated a wholly owned subsidiary, L&T Semiconductor Technologies Limited, on November 29, 2023. Over time, this company will be engaged in the business of fabulous semiconductor chip design and product ownership. I will now cover the various financial performance parameters for Q3-FI24. This quarter was a quarter of robust performance across the various financial parameters. Our group order inflows, revenues, and recurring PAT is up by 25%, 19%, and 20% respectively over the corresponding quarter of the previous year. Our NWC2 revenue is at 16.6% in Q3 of 2024, registering a sequential improvement of 10 basis points and 240 basis points on a Y-on-Y basis. Moving on to the individual performance parameters, our group order inflows for Q3 FY24 at Rs. 760 billion registered a Y-on-Y growth of 25%. Within that, our projects and manufacturing businesses secured order inflows of Rs. 602 billion for Q3, growing by 32% over the corresponding period of the previous year. Our Q3 FI24 order inflows in this projects and manufacturing portfolio are mainly from infrastructure and hydrocarbon segments. During the current quarter, the share of international orders increased in the projects and manufacturing portfolio was at 67%, which is 12% in Q3 of last year. During the quarter, orders were received across various spectrum of businesses like offshore vertical of hydro, renewable EPC, water utilities, airports, health, residential spaces, power transmission, as well as ferrous metals. Moving on to the prospects pipeline, We have a total order prospect pipeline of Rs. 6.27 trillion for the near term, vis-a-vis Rs. 4.87 trillion at the same time in the last year. This represents an increase of 29% on a Y-on-Y basis. The increase is largely due to the sharp improvement in the hydrocarbon prospect pipeline. I'll give you the broad backup of the overall prospects pipeline of 6.27 trillion, which is as follows. Infrastructure has a share of Rs. 4.1 trillion. The same was Rs. 3.88 trillion as of December 23rd. Hydrocarbon rupees 1.7 trillion as of December 24, vis-a-vis rupees 0.61 trillion as of December 23. Power business has an order prospects of 0.3 trillion as of December 24, as against 0.20 trillion last year. Heavy engineering defense in aggregate has an order prospects of 0.16 trillion as which is almost at the same level that we witnessed as of December 23. Moving on to order book, our order book is at Rs. 4.7 trillion as on December 23, which is up by 22% when compared to December 22. As our projects and manufacturing business is largely India-centric, 61% of our order book is domestic, and 39% international. Of the international order book of 1.84 trillion, around 92% is from Middle East and 2% from Africa. The remaining 6% constitute from various countries including Southeast Asia. It is evident that the GCC capex in both infra and hydrocarbon is on an upswing, largely led by the Saudi vision 2030. The breakdown of the domestic order book of Rs. 2.86 trillion, which I said is 61% of the overall order book, is as follows. Central government, 12%, state government, 31%, PSU or state-owned enterprises, 35%, and private sector, 22%. Approximately around 18% of our total order book of 4.7 trillion is funded by bilateral and multilateral funding agencies. Again, 92% of the total order book is coming from infrastructure and energy. You may refer to the presentation slides for further details. During the quarter ended December 23, Q3FI 24, we have deleted orders of close to Rs. 27 billion from the order book. As of December 23, our slow moving orders is well less than 1% of the total order book. Coming to revenues, our group revenues for Q3FI 24 at Rs. 551 billion registered a Y&Y growth of 19%. International revenues constituted 44% of the revenues during the quarter. The strong execution in the projects and manufacturing portfolio drove the overall group revenues for the quarter. In the projects and manufacturing business portfolio, our revenues for Q3-FI24 were at Rs. 393 billion, registering a Y-on-Y growth of 26%. Moving on to EBITDA, our group level EBITDA margin without other income for Q3-FI24 is 10.4% at drop of 50 basis points over Q3 of the previous year. This drop of 50 basis points is mainly due to job mix and cost pressures in the legacy EPC projects of the projects and manufacturing portfolio. The detailed breakup of the EBITDA margin business-wise is also given in the annexures to the earnings presentation. You would have noticed that the EBITDA margin in the projects and manufacturing businesses for Q3-FI24 is at 7.6% vis-à-vis 8.5% in Q3-FI23. On a sequential basis, the EBITDA margin in the projects and manufacturing business for Q3-FI24 is improved by 20 basis points, up from 7.4 that we printed for Q2 of the current financial year. I will cover the details a little later when I talk about the performance of each of the segments. Our recurring PAT for Q3 FY24 at rupees 29 billion is up 20% over Q3 of the last year. The robust PAT growth is reflective of the strong execution momentum and the lower tax expense. The group performance P&L construct, along with reasons for major variances under the respective function heads, is provided in the earnings presentation. Coming to working capital, our NWC to sales ratio has improved from 19% in December 22 to 16.6% in December 23, an improvement of 240 basis points. The NWC to sales ratio was 16.7 in the previous quarter ended September 2023. Our group level collections excluding financial services for Q3FI24 is Rs. 494 billion, vis-a-vis Rs. 434 billion in Q3FI23, representing an increase of 14% on a Y&Y basis. The improvement in gross working capital is on the back of improved customer collections, and which is also, in a way, manifest in the overall improvement in the NWC to sales ratio. Finally, trailing 12-month ROE for Q3-FI24 is 15.2%, vis-a-vis 12.4% in Q3-FI23, an improvement of 280 basis points. The improved profitability with every passing quarter along with the return of capital to shareholders in the form of first buyback that we did in the month of September is contributing to this improvement. As stated in the past, the focus of the group during this period, the staff plan period ending in 526, will be on cash generation, divestments from non-core assets, capex and investments in existing and newer businesses, and finally returning surplus cash to shareholders at regular intervals in order to create value over a period of time. Very briefly, I will now comment on the performance of each of the business segment before we give our final comments on our outlook for the medium term. We'll start with infrastructure segment. On order inflows, this segment secured orders of Rs. 432 billion for Q3-FI24, vis-a-vis Rs. 325 billion in Q3-FI23. representing a growth of 33% over the corresponding quarter of the previous year. During the current quarter, the orders were largely received in the renewable APC, water utilities, airports, health, residential premises, power transmission, as well as ferrous metals. Our order prospects pipeline in infra is around Rs. 4.1 trillion vis-a-vis Rs. 3.89 trillion during the same time last year. representing an increase of around 5%. The infra prospects pipeline of Rs. 4.1 trillion comprises of domestic prospects of Rs. 3.22 trillion and international prospects of Rs. 0.88 trillion. The sub-segment breakup of total order prospects in infra could be as follows. Transportation infra leads at 28%. And then we have minerals and metals at 17%, buildings and factories at 19%, water at 16%, power transmission distribution at 4%, heavy civil infra at 16%. I think that aggregates to 100. The order book of this segment is at rupees 3.18 trillion as of December 23. The book bill for infra is around three years. The Q3 revenues at Rs. 278 billion registered a strong growth of 27% over the comparable quarter of the previous year, largely aided by the strong execution progress across multiple jobs and across all the sub-segments. Our EBITDA margin in this segment for Q3 FY24 is at 5.5%, vis-a-vis 7% in the corresponding quarter of the previous year. The margin for the quarter is a function of job mix and the legacy jobs tapering off. The working capital intensity has substantially improved during the same period, resulting in stable return ratios for this segment over a period of time. Moving on to the next segment, which is energy projects, which comprises hydrocarbons and power. The receipt of a mega order in the Middle East enabled the boosting of hydrocarbon order book, whereas power business benefited from the receipt of the FGD order. We have a strong order prospects pipeline of rupees 2.01 trillion for this energy segment, comprising of hydrocarbon prospects of rupees 1.7 trillion and power prospects of rupees 0.3 trillion. The order book for this energy segment is at rupees 1.13 trillion as of December 23, with the hydrocarbon order book at Rs. 1.07 trillion and power at Rs. 54 billion. The Q3 FY24 revenues at Rs. 79 billion registered a healthy growth of 24%, mainly driven by the pickup in the execution ramp-up of international projects of the hydrocarbon business whereas lower revenues in the power business is largely reflective of a depleting order book. The energy segment margin in Q3 FI24 is at 9.7%, vis-a-vis 8.7% in Q3 FI23. The hydrocarbon margin in Q3 is in line with the previous year, whereas favorable customer claim enables the improvement in EBITDA margin for power. We will now move on to the high-tech manufacturing segment that comprises defense engineering and heavy engineering businesses. A receipt of multiple orders contributed to the order inflow in the defense business, whereas we witnessed order deferrals in the heavy engineering segment during the quarter. Our order prospects pipeline for this segment is Rs. 163 billion. The order book for this segment is Rs. 258 billion as of December 23. The strong momentum continues in defense, whereas heavy engineering revenue growth is impacted by a little subdued progress in nuclear jobs. The defense margin is reflective of job mix, whereas customer claims enabled the heavy engineering margin movement. On this segment, I would like to repeat the defense engineering business does not manufacture any explosives nor ammunition of any kind. including cluster ammunitions or anti-personal landmines or nuclear weapons or components for any of such munitions. The business also does not customize any delivery systems for such munitions. Moving on to the next segment, that is information technology and technology services, where we have the two listed entities, LTI Mine Tree and LTTS. The revenues for this segment at Rs. 112 billion in Q3 F5-24 registered a modest growth of 5%, largely in line with the subdued global macro conditions impacting IT spends. Despite ongoing macro concerns, the deal pipeline for this segment is healthy with good visibility across all offerings. Improved utilizations drive the margin improvement in LTI mine tree, whereas LTTS margins are largely in line with that of the previous year. I would not like to take too much time on this segment as both the companies in this segment are listed entities and the detailed fact sheets are already available in the public domain. We move on to L&T finance holdings, which is forming part of our financial services segment. Here again, L&T Finance Holdings is a listed subsidiary and the detailed results are already available in the public domain. During the quarter, L&T Finance Holdings had a merger of L&T Finance Limited, L&T InfraCredit Limited and L&T Mutual Fund Trusty Limited with itself and that got concluded. This merger will lead it to the creation of a simplified single lending entity and is expected to create internal synergy, superior governance, and unlock new revenues for growth. The Q3 of the current year revolved largely around a strong retail disbursement, which was possibly highest ever in a quarter, lower credit costs, better asset quality, and a rundown of the wholesale book. The balance sheet is strong on the back of an adequate provision coverage ratio, and inbuilt macro prudential buffers are already there. Financial Services achieved 91% retailization of its loan book in December 23, well ahead of its Luxia 26 targets. The retail book growth, asset quality, and the return on assets are highly satisfactory. Finally, sufficient capital in the balance sheet is available to pursue growth in the medium term. In a way, the stage is set for this business to truly achieve FinTech at scale. Moving on to the concessions portfolio, that's what we call as the development project segment. This segment includes the power development business comprising of Nava Power and also has Hyderabad Metro. Once again, I would like to mention that the profit consolidation of L&T IDPL, which is the holding company for largely a road concessions portfolio, at a pack level has been discontinued from Q4 of the last financial year post-signing of definitive agreement for sale of our entire stake. The investment in the joint venture L&T IDPL, therefore, is classified as held for sale in the group balance sheet. The majority of revenues in the development project segment is contributed by Naba Power. In the case of Hyderabad Metro, the improved ridership enabled revenue growth And NABA revenue was helped by higher PLFs. I'd like to give you some statistics on the Hyderabad metro operation. The average metro ridership has improved from 3.94 lakh passengers a day in Q3 of the previous year to 4.44 lakh passengers per day in the Q3 of FY24. Our average ridership in the previous quarter of the current year was 4.62 lakh passengers a day, higher compared to the current quarter, primarily due to the long holidays or the vacation for Q3, and also a free bus ride entitlement to females under the new Mahalakshmi scheme of the state government from December 23 onwards. The higher segment margin in Q3-FI24 is primarily due to improved metro ridership and consolidation of NABA profits. The metro at a pack level, we consolidated a loss of Rs. 2.54 billion in Q3-FI24, vis-à-vis a loss of Rs. 3.32 billion in Q3 of the previous financial year. For nine months FY24, we consolidated loss of Rs. 3.49 billion against the loss of Rs. 9.86 billion in the nine months of the previous financial year. Moving on to the last segment, which is others, this segment comprises reality business, industrial walls manufacturing, construction equipment, mining machinery, rubber processing machinery, and a residual part of our smart world and communication business. The Q3 revenue growth of 12% over the corresponding quarter of the previous year is mainly contributed by a higher percentage of handing over of residential flats in the reality business. The margin improvement in this segment is once again primarily contributed by the reality business. Coming to the last part of my presentation, which is the outlook. As I said earlier, the Indian economy is demonstrating resilience and is expected to grow by a healthy 7% in FY24. The country's robust economic trajectory is supported by resilient growth in the public spends by government, Improved demand conditions, robust balance sheets of banks and corporates, introduction of production-linked incentives, and as well as high business confidence, which is also attracting investments from the private sector. On the flip side, we are yet to see a significant private sector participation around owning greenfield concessions in a major way. Also, with general elections around the corner expected to be scheduled any time between April, May 2024, it is quite possible that the public ethics could witness a temporary slowdown. The global economy remains volatile with continuing military engagement in Europe and West Asia that is disrupting supply chain and global trade movements. The US economy has been resilient so far, but the UK and European economies are weak and the concern around China still persists. Despite these concerns or developments, the good news for our project's business is that Middle East, particularly Saudi Arabia, continues to pursue its investment plans across multiple sectors. In this backdrop, the company possesses the necessary capability and flexibility to continuously rebalance its approach and strategy to benefit from the dynamic business environment The company is focused on tapping emerging opportunities both in India and overseas, driven by its proven competence in the domains of engineering, manufacturing, construction, project management, and services for the profitable execution of its large order book. As it has always been, the company continues to remain committed to creating sustainable long-term returns for its shareholders. I will now comment on our guidance for FY24 before taking Q&A. On order inflows and revenue, we have performed exceptionally well both in terms of growth in order inflows and revenue in the nine-month period. In October, post the Q2 FY24 earnings call, we had indicated that we would be outperforming on the order inflow guidance for FY24 at the higher range of the band, which was 12%. And with respect to revenue, we also commented that possibly we will outperform 15% above, which is again the higher end of the band that we had given for revenue at the start of the year. This is the nine months ordering flows that we have seen and the robust order prospects. We are now revising our ordering flow guidance to 20% plus for the full year. And for revenue, we believe that we should be looking to achieving growth in high teams. It is difficult to pinpoint a specific range of growth possibility on ordering flows, especially in a pre-election period, amplified by continuing international geopolitical volatility. Therefore, we are constrained to give the order inflow guidance a little open-ended in terms of saying that we should be landing at 20% plus order inflow for the full year FY24. 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 capital intensity under check. Here again, as you all know, as a matter of discipline, we have never in the past pursued faster execution execution and the cost of compromising the working capital situation. We are therefore reasonably sure of achieving revenue growth in the high teens for the full year FY24. On margin, our progress on the nine-month margins in the projects and the manufacturing portfolio has been along expected lines. A combination of low-margin legacy jobs and newer jobs being in the ramp-up stage has depressed margin in the nine-month period. However, it does appear at this juncture that the multiple new jobs which are in the ramp-up stage may not be able to cross the valuation threshold for recognizing margin by the end of FY24, which means it could lead to some sort of a postponement of margin recognition of these jobs into next year. Therefore, we are fine-tuning our margin guidance in the projects and manufacturing portfolio from the earlier 8.59% band to a band of anywhere between 8.25% to 8.5% for the full year. I would like to reiterate once again that the slip-up in margin, if any, in this portfolio is more than made up by volume growth and improved working capital intensity resulting in superior return on investment by the end of the year. On working capital, since we have been able to preserve balance sheet gains in the nine months so far, we are revising the earlier guidance of a band of 16 to 18 percent to in and around the same levels that we achieved for December 23, which was at 16.6 percent. One can expect Given the fact that Q4 is a busy quarter and also various other international and domestic events lined up, we can expect that this 16.6 can go up by just minus 30 basis points on either side. With that, I conclude, ladies and gentlemen. I tried to give you an overall summary of our performance. We can get into Q&A.

Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch tone telephone. If you wish to remove 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 Mohith Kumar from ICICI Securities. Please go ahead.