Larsen & Toubro Limited

Ladies and gentlemen, good day and welcome to the Larson & Toubro Limited Q2 FY25 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 the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. Today we have with us on the call Mr. Subramanian Sharma, Whole Time Director and President of Energy Division and Mr. P. Ramakrishnan, Head Investor Relations of Larsen & Toubro Limited. I now hand the conference over to Mr. P. Ramakrishnan. Thank you and over to you, sir.

Thank you, Sagar. Good evening, ladies and gentlemen. A very warm welcome to all of you into the Q2FI 25 earnings call of Larsen & Toubro. The presentation, the earnings presentation was uploaded on the Stock Exchange and on our website around 6.35 p.m. just now, maybe one hour back. I hope you have had a chance to have a quick look at the numbers. As per past practice, instead of going through the entire presentation, I will take you through the important highlights for the quarter, followed by our financial performance summary for the quarter due to FY25. in the next 25 to 30 minutes. Post that, we will take questions. Before I start, a brief disclaimer from our end. The presentation that has been uploaded on the Stock Exchange and our website today, including the discussions that we will have on the call today, may contain certain forward-looking statements concerning the group's business prospects and profitability that are subject to several risks and uncertainties. And the actual results could materially differ from those in such forward-looking statements. I would request you to go through the detailed disclaimer which is available in slide two of our earnings presentation that has been uploaded on our back. The Indian economy has continued to remain resilient and is expected to maintain a stable growth momentum for the rest of the financial year. This growth is being aided by a prudent policy framework of the government of India complemented by a proactive monetary policy management from the Reserve Bank of India. Besides achieving a healthy trade-off between growth and inflation, the country's fiscal discipline and a well-managed balance of payments converges towards macroeconomic stability. The well-capitalized balance sheets of the banks and the companies further strengthen our hope of a sustainable growth in the real GDP in the near to medium term. With the risk of elections and monsoon behind us, one expects recovery in economic activity in the coming quarters. Further, we expect a healthy public and private cap expense to drive economic growth in the second half of this fiscal year, FY25. Moving on to international, the global macro picture is marked by the geopolitical uncertainty arising out of the conflicts in West Asia and Eastern Europe. The growing divergence in the growth inflation dynamics across countries has resulted in varying monetary policy responses wherein many developed nations have reduced rates while some are providing policy stimulus to revive their economies. Despite all of this chaos, it is encouraging to note that the countries in the Middle East led largely by Saudi Arabia are continuing to focus on investments in oil and gas, infrastructure, industrialization and energy transition projects. Having covered the macro landscape, let me now share a few important highlights for the quarter. Effective for September 2024, the company has carved out a separate business vertical for renewable energy out of the power transmission and distribution business within its infrastructure segment primarily to capitalize on the growth opportunities in the renewable segment in a more focused manner. This strategic move comes as the global shift towards clean energy gains momentum and is driven by the need for decarbonized electricity to combat an all-pervasive climate change. Moving on to carbon-like solutions, I wish to clarify once again that in Q1 2015, Q1FI25, we had renamed L&T Energy Power to Carbon Light Solutions. We had mentioned that we expect this business to play a major role as an enable for energy transition by offering low carbon solutions. This will include gas to power, carbon capture, and various low carbon solutions. We had also mentioned that we were not keen in pursuing EPC opportunities in the thermal power because of the unfavorable contracting terms, whereas we would selectively pursue BTG, that is boiler and turbine generator island opportunities over time. I hope this clarifies our position with respect to our strategy with respect to carbon light solutions. The heavy engineering business won a new order on a sole sourcing basis from ITER, which is the International Thermonuclear Experimental Reactor Project, for deployment of a critical advanced welding technologies for the world's largest nuclear fusion project at the ITER site in southern France. The ITER is an engineering mega project aimed at creating energy through nuclear fusion process. Earlier in calendar 2020, L&T had successfully fabricated and completed the early delivery of the world's largest stainless steel high vacuum pressure vessel, cryostat for the ITER project. The ITER project is a globe-spanning collaboration comprising of 35 countries. Coming to the precision engineering and systems business, since its inception in the early 80s, this business has built a portfolio of wide-ranging, indigenously designed and developed products, systems, solutions, platforms, and technologies for the defense engineering and aerospace sectors. We believe the government's indigenization efforts will immensely benefit the defense PSUs, including multiple private companies such as us. While remaining very excited about the opportunities in the near future, we also need to factor the stretched timelines around ordering as multiple programs need to pass the development test and need government clearances at various levels. We will regularly communicate with investors on the progress made. With respect to the green energy, the electrolyzer manufacturing business, we have signed a technology license agreement for 4-megawatt electrolyzer design with McPhee on the 18th of September, 2024. Previously, this agreement was signed for 0.5-megawatt electrolyzer design with McPhee in March, 2013. Continuing with the electrolyzer factory expansion, the first automated robotic line for stack assembly with a capacity of 150 megawatts has been installed and commissioned successfully at our AM Nike engineering complex in Hazira in September 24. As mentioned earlier, we will ramp up the capacity to 500 megawatts in the near to medium term, followed by 1 gigawatt in the medium to long term. The group will actively pursue opportunities in the green energy EPC and target selective participation in green energy development projects as well. We will share the details at an appropriate time. Coming to real estate development, in our group strategic plan that ends FY26, we had targeted exit order inflows, that is FY26 order inflows and revenues for the realty development business around 8,000 crore and 5,000 crore respectively for the year of FY26. We are on track to achieve the goals on the revenue side. As far as order inflows are concerned, they are dependent on launching of projects in Mumbai, Bangalore, Chennai, and possibly new launches elsewhere. We remain optimistic on order inflows for the current as well as the next financial year. Whereas it will be difficult to comment on the period beyond FY26, I would like to mention here that we possibly target around three to four times growth on order inflow and revenue from our exit trajectory in FY26. Depending on the market conditions, we will pursue growth in residential and commercial through multiple formats. Here again, we will share the details once our plans are finalized with respect to real estate development. Coming to The semiconductor design, I would say, incubation that we have done, this is done through L&T Semiconductor Technologies Limited, LTSCT, that is currently a wholly owned subsidiary. LTSCT has inaugurated its new development center in Bangalore, a pivotal step in its journey to innovation and excellence in the Indian semiconductor industry. During the current quarter, LTSCT completed the acquisition of 100% equity of Silicon Systems Private Limited, a Bengaluru-based semiconductor startup focused on power semiconductors with a portfolio of more than 30 granted patents and a team of 60 experienced engineers. The acquisition is expected to accelerate LTSCT's product development roadmap for power semiconductor devices. LTSCT also signed a MOU with the Center for Development of Advanced Computing, an autonomous scientific entity under the Ministry of Electronics and Information Technology, Government of India. The strategy collaboration will aid indigenization efforts with an emphasis on the creation of Make in India integrated circuit, system on chip circuit, and electronic systems design and manufacturing solutions for automotive, industrial, and energy applications. At the current juncture, LTSCT will operate as a fabless semiconductor entity with a primary focus on nurturing IP and fostering innovation with the Indian semiconductor industry. LTSCT therefore proposes to operate as an integrated product company offering a wide range of semiconductor solutions and software products with a focus on analog, power, mixed signal, MEMS, radio frequency, and VLSI chips catering to automotive industrial products, communication, and energy infrastructures in India, as well as globally. Coming to another expansion to a new business, that is data centers, a quick update. A 2-megawatt data center in Panway is under integrated testing and is expected to be commissioned in the current quarter, which is October to December 24. Further, a 12-megawatt data center in Chennai is nearing completion of its testing phase and is expected to be commissioned shortly. We have plans of scaling up the data center in Chennai to 30-megawatt in the near term. Besides Chennai, we will also be looking to set up data centers at Mahapay Navi Mumbai and Whitefield Bangalore in the near to medium term. We are also evaluating multiple other opportunities currently and will share the details once the plans are finalized with respect to this business. Lastly, Hyderabad Metro achieved the highest ridership ever on a single day of 5.63 lakhs on August 14, 2024. Now I will start by giving you a summary of the various financial performance parameters for Q2 FY25. Q2 FY25 was a quarter of robust performance across all the financial parameters. Our group order inflows for Q2 registered a sequential growth of 13%. On the back of a strong ordering momentum, our order book crosses a new milestone of Rs. 5 trillion. Aided by a strong execution momentum from several businesses within the core projects and manufacturing portfolio, our group revenues for the quarter registers a growth of 21% on a Y&Y basis. Similarly, our margin for the projects and manufacturing portfolio also expanded by 20 basis points over the corresponding quarter of the previous financial year. Our networking capital to revenue at 12.2% as of September 24, this is with respect to the group, improves by 170 basis points on a sequential basis. A very strong financial performance this quarter is also supported by robust free cash flows and an improvement in the return on equity as well. Our return on equity on a trailing 12-month basis as on September 24 is at 16.1%, improving by 140 basis points and 80 basis points on a sequential and Y-on-Y basis, respectively. Moving on to individual performance parameters, the group order inflows for Q2 FY25 at Rs. 800 billion registered a sequential growth of 13%, and a Y-on-Y decline of 10%. The corresponding quarter of the previous year had the benefit of the receipt of some international ultra-mega orders in the hydrocarbon business. Within the group order inflows, our projects and manufacturing business secured order inflows of Rs 630 billion for Q2, reporting a degrowth of 14% over the corresponding period of the previous year. Just now I mentioned that this is largely because of the high base in the corresponding quarter of the previous financial year. Our Q2 order inflows in the projects and manufacturing portfolio are mainly from infrastructure, hydrocarbon, precision engineering systems, as well as heavy engineering. During the current quarter, our share of international orders in the projects and manufacturing portfolio is at 62% vis-a-vis 68% in Q2 of last year. The current quarter witness orders getting received from multiple segments like renewables, transmission and distribution, roads and runways, urban transit systems, nuclear power, hydel and tunnels, minerals and metals, factories, precision engineering systems, and as well as offshore vertical of the hydrocarbon business. Moving on to the prospects pipeline for the near term, we have a total prospects pipeline of rupees 8.08 trillion for the remaining six to, for the near term, for more so for the six months of the current financial year. This corresponds to 8.78 trillion at the same time in the last year representing, I would say, a marginal drop of 8% on a Y-on-Y basis. This decrease is primarily due to a fall in the hydrocarbon and carbon light prospects pipeline. The broad breakup of the overall prospects pipeline for the near term, largely for six months, is as follows. Infrastructure comprises rupees 5.42 trillion vis-a-vis rupees 5.06 trillion last year. Hydrocarbons, rupees 2.25 trillion current year vis-a-vis rupees 2.91 trillion last year. Carbon light solutions, rupees 0.24 trillion vis-a-vis rupees 0.55 trillion last year. Aggregate of heavy engineering and precision engineering and systems, rupees 0.16 trillion vis-a-vis Rs. 0.23 trillion last year. Moving on to order book, our order book is at Rs. 5.1 trillion as of September 24, which is up 13% vis-a-vis September 23 last year. As the products and manufacturing business is largely India-centric, 60% of the order book is domestic and 40% international. Out of the international order book of rupees 2.05 trillion, around 85% is from Middle East and the rest is from other countries across the world. Like I said earlier, the various countries in the Middle East are continuing to focus on investments in oil and gas, infrastructure, industrialization and energy transition. The breakdown of the domestic order book of rupees 3.05 trillion which I said is 60% of the overall order book, is as follows. The share of central government projects is 14%. State government projects aggregate to 28%. Prospects from PSUs or state-owned enterprise comprise 36%, and the private sector has the remaining share of 22% of the domestic order prospects. Approximately around 17% of our total order book of Rs. 5.1 trillion is funded by bilateral and multilateral funding agencies. Again, 90% of this total order book comprises from infrastructure and energy. You may refer to the presentation slides for further details. During the H1-FI25, that is April 24 to September 24, we have deleted orders of Rs. 6 billion from the order book. There are no deletions from the order book in Q2-FI25. As of September 24, the share of slow moving orders is minuscule, which is around 0.5% of the total order book. Coming to revenues, our group revenues for Q2F5-25 at Rs. 616 billion registered a strong Y&Y growth of 21%. International revenues constituted 52% of the revenues during the quarter. The strong execution momentum in infrastructure, hydrocarbon, and precision engineering systems within the projects and manufacturing portfolio drove the overall group revenues for the quarter. Within the group revenue, the revenue for P&M business for Q2 FI25 is Rs. 445 billion, up by 28% over the corresponding quarter of the previous year. Moving on to EBITDA margin, our group level EBITDA margin without other income for Q2 FI25 is 10.3%, which are 11% in Q2 of the previous year. This EBITDA margin variance is mainly due to a non-recurring TOD, that is transit-oriented development monetization gain that happened in Hyderabad Metro in the previous year. The detailed breakup of the EBITDA margin business-wise, including other income, is given in the annexures to the earnings presentation. You would have noticed that the EBITDA margin in the projects and manufacturing business for Q2 FY25 is at 7.6% vis-a-vis 7.4% in Q2 of the previous year. I will cover the details a little later when I talk about the performance of each of the segments. Our consolidated PAC for Q2 FY25 at Rs. 34 billion is up by 5% over Q2 of the last year. This PAT growth is reflective of improved activity levels partly offset by lower other income. The drop in other income is a function of lower average treasury investments in the current quarter compared to the corresponding quarter of the previous year. As you may be aware, the drop in average treasury investment is also attributed to the share buyback that was done by the company last year. Further, PAT of the corresponding quarter of the previous year includes this gain that I was talking about the TOD monetization in Hyderabad Metro of Rs. 5.12 billion. Excluding this non-recurring TOD monetization gain, the consolidated PAC for Q2 FY25 has registered a growth of 25% over the corresponding quarter of the previous financial year. The group performance, the P&L construct along with the reasons for major variances under the respective function is provided in the presentation. You may go through the same for further details. Coming to net working capital, the net working capital to sales ratio or NWC to sales ratio has improved from 13.9% in June 24 to 12.2% in September 24, mainly led to an improvement in the gross working capital to sales ratio, backed by strong customer collections during the quarter. Further, on a why-on-why basis, the NWC to sales has improved from 16.7% in September 23 to 12.2% in September 24. The group level collections excluding financial services business for Q2-FI25 is Rs. 621 billion vis-a-vis Rs. 463 billion in Q2-FI24, registering an increase of 34% on a Y-on-Y basis. I would also request you to go through the cash flow statement as part of the annexures to the earnings presentation. The cash flow from operations for Q2-FI25 at Rs. 77 billion, has more than doubled vis-a-vis Rs. 35 billion in Q2 FY24. Finally, trailing 12 months ROE for Q2 FY25 is 16.1% vis-a-vis 15.3% in Q2 FY24, an improvement of 80 basis points. The improved profitability with every passing quarter, along with the return of capital to shareholders in the form of first buyback, is contributing to this improvement. Very briefly, I will now comment on the performance of each of the business segments before we give our final comments on the outlook. First, infrastructure. Coming to ordering flows, this segment secured orders of Rs. 495 billion for Q2-FI25, registering a robust growth of 77% on a Y-on-Y basis. International orders constituted 63% of the total order inflows. The current quarter, we received orders mainly in the transmission and distribution, renewable energy, and adequately supported by other business verticals like minerals and metals, buildings and factories, transportation, and heavy civil infrastructure. Our order prospect pipeline in infrastructure segment for the near term, that is six months, is around Rs. 5.42 trillion vis-a-vis Rs. 5.06 trillion during the same time last year. This represents an increase of around 7%. The infra prospects pipeline of Rs. 5.42 trillion comprises of domestic prospects of Rs. 4.14 trillion and international prospects of Rs. 1.28 trillion. The sub-segment breakup of the total order prospects in this segment is as follows. Water and effluent treatment comprises 17%. Power transmission and distribution, 7%. Renewables, 8%. Transportation infrastructure, 28%. Buildings and factories, 15%. Heavy civil infrastructure, 18%. And minerals and metals, 8%. The order book of this segment at Rs. 3.43 trillion as of September 24. The book bill or the execution time frame for this order book is around three years. The Q2 revenues for infrastructure segment at Rs. 320 billion registered a strong growth of 30% over the comparable quarter of the previous year. largely aided by a very strong execution progress across multiple jobs from the opening order book. Our EBITDA margin in this segment for Q2 FY25 is at 6%, vis-a-vis 5.4% in the corresponding quarter of the previous year. The higher margin is primarily explained by improved job progress. Moving on to the next segment, energy projects that comprises hydrocarbon and carbon light solutions. The decline in the Q2 order inflow for this segment is mainly due to a high base that I mentioned earlier during the call. Like I mentioned, the previous year Q2 had the benefit of ultra mega orders in the Middle East in the hydrocarbon business. We have a strong order prospects pipeline of rupees 2.49 trillion for this energy segment for the remaining six months. that comprises of hydrocarbon prospects of Rs. 2.25 trillion and carbon light solutions prospects of Rs. 0.24 trillion. The order book for this energy segment is at Rs. 1.17 trillion as of September 24 with the hydrocarbon order at Rs. 1.13 trillion and the carbon light solutions business having an order book of Rs. 0.04 billion. The Q2FI25 revenues for the segment at Rs. 89 billion registers a healthy growth of 31%, driven mainly by the execution ramp-up of international projects in the hydrocarbon business. The lower revenues in carbon light solutions are largely reflective of a depleting or a lower order book. The energy segment margin in Q2FI25 is at 8.8%. vis-a-vis 9.5% in Q2 of the previous year. The negative variation hydrocarbon margin in Q2 or the previous year is reflective of the stage of executions of the various jobs, whereas the improvement in the carbon solutions project margin is due to a better job mix. We now move on to high-tech manufacturing segment that comprises precision engineering and systems and the heavy engineering business. The receipt of land and marine system orders contributed to the order inflow growth in the precision engineering systems business, whereas heavy engineering business benefited from the receipt of a significant nuclear order. The order book of this segment is at Rs. 356 billion as of September 24. The order prospects pipeline for the remaining six months in this segment is around Rs. 158 billion. A strong execution momentum continues in the precision engineering systems, whereas heavy engineering revenue decline is reflective of jobs in the early stages of execution. The segment margin in the current quarter is impacted by additional cost provisions in certain jobs in the heavy engineering business. Moving on to the information technology and technology services portfolio, which largely comprises this business, this segment largely comprises of the two listed entities, LTI Mindtree and L&T Technology Services. The revenues of this segment at Rs. 118 billion in Q2 FY25 registers a modest growth of 6%, which is largely reflective of present market conditions. Despite the ongoing macroeconomic concerns, the deal pipeline for this segment is healthy with good visibility across all the segments that both the companies cater to. The segment margin improvement in Q2 vis-a-vis the corresponding quarter of the previous financial year is mainly due to higher forex gains and other income. As both the companies in this segment are listed entities, the detailed fact sheets of their performance are already available in the public domain. We now move on to L&D Finance Limited. Here again, the detailed results are available in the public domain. But very briefly, I would like to cover Q2 revolved around very strong retail disbursements, healthy collections, and improved profitability. The balance sheet is strong on the back of inbuilt macro prudential buffers. The financial services business has achieved 96% retailization of loan book in September 24, well ahead of its Luxia 26 targets. The ROAs remain healthy at 2.6% despite the sectoral headwinds. Like I had mentioned in my previous call as well, this business is building itself on the five pillars of growth, namely enhancing customer acquisition, a sharpening credit underwriting process, implementing futuristic digital architecture, heightened brand visibility, and capability building. And finally, adequate capital in the balance sheet is available to pursue growth in the near to medium term. Moving on to development project segment, this segment includes Nava Power and Hyderabad Metro. Most of the revenues in this segment are contributed by Nava Power. The revenue and margin variance of this segment is explained by the non-recurring TOD monetization of Rs. 5.12 billion in Hyderabad Metro in the quarter of the previous year. At this juncture, I would like to give you some ridership statistics on the Hyderabad Metro. The average metro ridership has improved from 4.32 lakh passengers in a day in Q1 FY25 to 4.68 lakh passengers per day in Q2 FY25. The ridership in Q2 FY24 was 4.62 lakh passengers a day. The metro at a pack level, we have the group has consolidated a loss of rupees 2.07 billion in Q2 FI 25 vis-a-vis a profit of rupees 2.4 billion in Q2 FI 24. Moving on to the other segment, this segment comprises reality, industrial walls, construction equipment and mining machinery, rubber processing or tire processing machinery, and the residual portion of the smart world and communications business. The Q2 revenues for this segment grew by 2% over the corresponding quarter of the previous year, mainly contributed by higher handover of residential units in the reality business, improved performance in walls business, partly offset by a degrowth in the construction equipment mining machinery business, including the rubber processing machinery as well. The sale of a commercial space in reality and improved overhead recovery in the Walsh business drives the segment margin improvement in Q2 over the corresponding quarter of the previous year. Coming to the last part of my presentation, the outlook for the near term, The Indian economy has remained sanguine despite the ongoing global political turbulence and is poised for steady growth. The macroeconomic parameters of inflation and growth are well balanced. The investment activity has remained resilient with the government cap ex rebounding from a contraction that was observed in the first quarter. Additionally, a new government policy offering employment incentives to workforce and companies could improve the availability of skilled and trained labor. A better than expected southwest monsoon augurs very well for the revival of the rural economy and consumption demand. With the government's fiscal consolidation efforts, the government debt is projected to decrease. Further, consumer inflation is anticipated to remain range bound on account of an improved agricultural output. The various high-frequency indicators point towards a healthy growth momentum. The manufacturing activity is also gaining on the path of improving domestic demand, lower inputs costs, and a supportive policy environment. The global economic perspective is one of cautious optimism as the conflicts in Eastern Europe and West Asia are yet to spill over beyond the affected countries. The continuing disruptions in the Red Sea are affecting global trade in terms of higher costs and longer lead time. Amidst all this upheaval, the Middle East continues to expand its investment in oil and gas industrialization and the various energy transition initiatives. The China Central Bank has unveiled its biggest stimulus since the pandemic to pull the economy out of its deflationary slide and back towards the path of growth. Lastly, heightened economic and financial market volatility is likely to continue in the short term as the US presidential elections are just around the corner. NIT is confident that the various structural reforms undertaken by the Indian government in the last 10 years will improve the quality of India's growth, besides setting a strong foundation to propel the realization of a Vikasith Bharat by 2047. The company remains committed on pursuing a technology-driven growth and deliver profitable returns to all its stakeholders on a sustained basis. Lastly, we continue to maintain our guidance for the current financial year around group order inflows, group revenues, margins in the projects and manufacturing portfolio, and group net working capital to revenue. Just to recall, the guidance for order inflow was 10%. For the group revenues was 15%. The margins in and around the same for the margins for the P&M portfolio in and around the same level that we had printed for FY24 and the NWC to revenue target around 15% as of March 25. Thank you, ladies and gentlemen, for the patient hearing. We can now begin with 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 their touch tone phone. 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.