Larsen & Toubro Limited

and welcome to the Larson & Toubro Limited Q3 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, old-time director and president of P Energy Division, and Mr. P Ramakrishnan, head investor relations of Larsen & Toubro Ltd. I now hand the conference over to Mr. P Ramakrishnan. Thank you, and over to you, sir.

Thank you, Sarwar. Good evening, ladies and gentlemen. This is PR, P Ramakrishnan. A very warm welcome to all of you into the Q3 F525 earnings call of Larsen & Toubro Ltd. The earnings presentation was uploaded on the Stock Exchange and on our website around 6.30 p.m. I hope you had a chance to have a review, a quick review of the same. As usual, instead of going through the entire presentation, I will summarize the highlights for the quarter, followed by the financial performance summary in the next 30 minutes or so. and post which myself and Mr. Sumnesh Sharma, we will take the questions. Before I begin the overview, a brief disclaimer. The presentation that we have uploaded on the Stock Exchange and our website today, including the discussions we may have on the call today, may contain certain forward-looking statements concerning the group's performance, business prospects, and profitability. This would be subject to several drifts 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 2 of the earnings presentation that we have uploaded just now. The growth momentum of the Indian economy has waned a bit in the recent quarters. The urban consumption has tapered off as the excess savings from the pandemic have been exhausted, formal sector wages have slowed down, and the consumption lending norms have also been tightened. Rural consumption, on the other hand, has continued as a healthy clip on the back of robust agricultural activity. Public investments have also slowed down due to the recent central and state elections in the country, whereas private investments have been episodic at best. Nevertheless, the recent pickup in the various high-frequency economic indicators suggests that the slowdown in economic activity has possibly bottomed out and could recover on the back of improved government spends in the near term. Moving on to the international landscape, the global situation continues to be marked by military conflicts, the changes in the political landscape across several countries, and trade wars, which is threatening to reignite inflation and minimal policy choices available to central banks. Similarly, the government across countries with elevated debt to GDP ratios are finding it difficult to impact fiscal impulses at will. On the positive side though, the ceasefire between Hamas and Israel is expected to bring the much needed stability in the GCC region. The GCC region led by Saudi Arabia is continuing to strengthen its physical and digital infrastructure besides monetizing its oil and gas assets. Coincidentally, multiple GCC countries are also embarking upon the energy transition journey with utmost seriousness. Having covered the macro landscape, let me share a few important highlights of the company for the quarter. The company posted or reported the highest ever order in growth in the history. This was received during the quarter for 1.16 trillion. The growth of 53% on a Y-on-Y basis was backed by a strong ordering momentum. in the infrastructure, hydrocarbon, carbon-based solutions, and precision engineering and systems businesses. Despite the lackluster economic activity in India in Q3, we have secured Rs. 987 billion, which is 64% Y-on-Y basis, of orders in the products and manufacturing business portfolio during Q3. with domestic and international contributing about 48% and 52% respectively. Moving on, L&T Energy Green Tech Limited has won 90,000 MTPA green hydrogen capacity in the tranche two of the green hydrogen production PLI at an average incentive of rupees 11.11 per kg, rupees 11.11 per kg of hydrogen. This incentive to be distributed over a period of three years will aggregate to a total benefit of around 300 crores. Thirdly, LTI MineTree recorded its highest ever deal wins in Q3 of 525 at USD 1.68 billion. Similarly, LTTS, L&T Technology Services, also witnessed its highest ever large deal bookings during the quarter, aided by eight large deals across six months, which includes one USD 500 million deal, two USD 35 million deal, two USD 25 million deals, and three USD 10 million deals. NCTS signed a definitive agreement on November 11, 2024, to acquire a 100% stake in Silicon Valley-based IntelliSwift and its subsidiaries for a consideration of USD 110 million. The objective of this acquisition was to deepen the company's offerings across software product development, platform engineering, digital integration, data, and AI. IntelliShift has 25 plus Fortune 500 logos, including five of the top ER&T spenders in software and technology. And it is also associated with four of the top five hyperscalers. This acquisition got fully closed this month. Moving on to financial services, L&T Finance Limited achieved a portfolio retailization of 97% in Q3, FY25. A milestone this business has achieved way ahead of its Lakshya 2026 targets. Lastly, the data center business has entered into a strategic business partnership with E2E networks and Indian cloud and AI cloud provider towards the adoption of JNAI solutions in India to foster a fundamental shift in the way accelerated computing on cloud is used by Indian corporates. Further, an investment agreement was signed on November 5th, 2024 for the acquisition of 21% stake in E2E networks of which 15% stake has been acquired through a preferential allotment of equity shares on December 4th for an aggregate consideration of Rs. 10.79 billion. The secondary acquisition of 6% is expected to be completed before May 30th, 2025. Now, let me now cover the various financial performance parameters for Q3 FY25. This quarter was a quarter of robust performance across the various financial parameters. Our group order inflows for Q3 registers a Y-on-Y growth of 53%. On the back of a strong ordering momentum, our order book is at Rs. 5.64 trillion on December 24. This has registered a growth of 20% on a Y-on-Y basis. Aided by a strong execution momentum from several businesses within the projects and manufacturing portfolio, our group revenues for the quarter registered a growth of 17% on a Y-on-Y basis. Our margins of the project and manufacturing portfolio at 7.6% is in line with the corresponding period of the previous year. Our net working capital to revenue is at 12.7% as on 31st December 24, this improvement of almost 390 basis points on a Y-on-Y basis. Our return on equity on a trailing 12-month basis as on December 24 is at 16.1%, improving by 90 basis points on a Y-on-Y basis. I now move on to the individual performance parameters. As said earlier, our group order inflows for Q3 FI25 at rupees 1160 billion registered a Y-on-Y growth of 53%. Within the group order inflows, our products and manufacturing businesses secure order inflows of Rs. 987 billion for Q3, reporting a robust growth of 64% over the corresponding period of the previous year. Our Q3 order inflows in the field and portfolio are mainly from infrastructure, carbon life solutions, hydrocarbon, and the precision engineering and systems businesses. During the current quarter, the share of international orders in the premium portfolio is at 52%, vis-a-vis 67% in Q3 of last year. Moving on to the order prospects pipeline, we have a total order prospects pipeline of rupees 5.51 trillion for the remaining three months of FY25, vis-a-vis Rs. 6.27 trillion at the same time last year. This represents a drop of 12% when compared to December 23 order prospects pipeline. This decrease is primarily due to the fall in the hydrocarbon and carbon light prospects. The broad breakup of the overall prospects pipeline for the remaining three months would be as follows. The share of infrastructure is Rs. 4.00 trillion vis-a-vis Rs. 4.01 trillion last year. The hydrocarbon prospects pipeline is at Rs. 1.44 trillion as of December 24 when compared to Rs. 1.71 trillion as of December 23. The heavy engineering and the precision engineering systems business, which caters to what we call the high-tech manufacturing segment, the auto prospects pipeline is at Rs. 0.06 trillion vis-a-vis Rs. 0.16 trillion last year. Moving on to the order book, our order book is at rupees 5.64 trillion as on December 24, which is up 20% vis-a-vis December 23 last year. As the products and manufacturing business is largely India-centric, 58% of this order book is domestic and 42% international. Of the international order book of rupees, 2.37 trillion, around 84% is from Middle East and 3% from Africa, and the remaining 13% comprise from other countries of 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 Rs. 3.27 trillion, which I said is 58% of the overall order book as of December, comprises of central government order book orders at 15%, state government orders at 26%, orders from public sector corporations or state-owned enterprises, the share being 39%, and the private sector contributing to 20% of the domestic order book. Approximately around 15% of the total order book of UPI's 5.64 trillion is funded by bilateral and multilateral funding agencies. Once again, 90% of this total order book comprises orders from infrastructure and energy. You may refer to the presentation slides for further details. During the nine-month period, F525, we have deleted orders of Rs. 6 billion from the order book. There has been no deletion of orders from the order book in the current quarter, which is Q3 F525. As of December 24, our slow-moving orders is around 0.5% of the order book. Coming to revenues, our group revenues for Q3-FI-25 at Rs. 647 billion registered a strong Y-on-Y growth of 17%. International revenues constituted 51% of the revenues during the quarter. The strong execution momentum in infrastructure, hydrocarbon, and the precision engineering systems businesses within the P&M portfolio drove the overall group revenues for the quarter. Within the group revenues, the revenues for the projects and manufacturing businesses for Q3 FY25 is Rs. 473 billion, up by 20% over the corresponding quarter of the previous year. Moving on to EBITDA margin. Our group level EBITDA margin without other income for Q3 FY25 is 9.7% vis-a-vis 10.4% in Q3 of the previous year. This EBITDA margin variance is mainly due to the revenue mix favoring the products and manufacturing segment and also lower operating margin in the ITTS segment. The detailed breakup of the EBITDA margin business-wise, including other income, is given in the annexures to the earnings presentation. You would also notice that the EBITDA margin in the production manufacturing portfolio for Q3 FY25 is at 7.6% in line with the corresponding quarter 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 PAT for Q3 FY25 at Rs. 33.6 billion is up 14% over Q3 of the previous year. This PAT growth is reflective of increased activity levels and improved treasury operations. The primary reason behind group PAT growth of 14%, despite group revenues growing at 17% for the quarter, is the lower operating leverage in the ITTS portfolio and slightly higher credit costs in our financial services business. The group performance P&L construct, along with the reasons for major variances under the respective function as is provided in the earnings presentation. You may go through the same for the details. Coming to working capital, our net working capital to sales ratio has improved from 16.6% in December 23 to 12.7% in December 24, mainly due to an improvement in the gross working capital to sales ratio backed by strong customer collections during the quarter. Our group-level collections, excluding the financial services segment for Q3 FY25, is Rs. 591 billion, vis-a-vis Rs. 494 billion in Q3 FY24, registering an increase of 20% on a Y-on-Y basis. You may also like to go through the cash flow statement as part of the annexures to the earnings presentation. Finally, the trailing 12-month return on equity for Q3 of 2025 is 16.1%, reserving 15.2% in Q3 of 2024, an improvement of 90 basis points for the year. Very briefly, I will now comment on the performance of each business segment before we give our final comments on our outlook for the remaining period of current year. First, infrastructure coming to order inflows. This segment secured orders for Rs. 491 billion for Q3 FY25, registering a robust growth of 14% on a Y-on-Y basis. International orders constitute 74% of the total order inflows. During the current quarter, the orders were mainly received in renewables, power transmission distribution, water, buildings and factories, and minerals and metals sectors. Our order prospects pipeline in infrastructure segment for the remaining three months is around Rs. 4 trillion vis-a-vis Rs. 4.01 trillion during the same time last year. This infra prospects pipeline of Rs. 4 trillion comprises of domestic prospects of Rs. 3.15 trillion and international prospects of Rs. 0.85 trillion. The sub-segment breakup of this total order prospects in infra would be as follows. Transportation infra share is 35%, heavy civil infra structure at 18%, water also at 18%, buildings and factories at 14%, minerals and metals at 6%, power transmission distribution at 6%, and renewables at 3%. The order book for this segment is at Rs. 3.61 trillion as of December 24. The book bill for infra is around three years. The Q3 revenues at Rs. 321 billion registered a healthy growth of 15% over the comparable quarter of the previous year, largely aided by execution across multiple jobs from a large opening order book. Our EBITDA margin in this segment for Q3 FY25 is at 5.5% in line with the corresponding quarter of the previous year. Moving on to the next segment, that is energy projects. This comprises of hydrocarbon and carbon light solutions. The receipt of two ultra-supercritical thermal power plant orders helps the carbon light solutions order book, whereas hydrocarbon benefited from the receipt of a mega-international onshore order. We have a strong order prospects pipeline of Rs. 1.44 trillion for this energy segment for the balance three months, comprising of entirely hydrocarbon prospects. The order book of this energy segment is at Rs. 1.46 trillion as of December 24, with the hydrocarbon order book at Rs. 1.1 trillion and carbon-like solutions at Rs. 0.27 trillion. The Q3 FY25 revenues for the segment at Rs. 111 billion registers a strong growth of 41% driven mainly by the execution ramp up in domestic and international projects of hydrocarbon, whereas lower revenues in carbonate solutions are reflective of a depleting opening order book. The energy segment margin in Q3 FI25 is at 8.3% vis-a-vis 9.7% in Q3 FI24. The negative variation in hydrocarbon margin over the previous year is largely reflective of the stage of execution of the various jobs in the portfolio, whereas carbon net solutions margin improved due to a favorable game settlement. We will now move on to high-tech manufacturing segment, which comprises of the precision engineering systems and the heavy engineering businesses. The precision engineering and systems business benefits from the receipt of the K9 Vajra repeat order, and multiple international order helps the heavy engineering order book. The order book for this segment at Rs. 418 billion as of December 24th. The order prospects pipeline for the remaining three months in this segment is around Rs. 65 billion for the next three months. The strong execution momentum continues in the precision engineering and systems, whereas muted revenues in heavy engineering is reflective of jobs in the early stages of its progress. The execution cost savings in heavy engineering business aids segment margin improvement at the overall segment level. Moving on to the next segment, which is the IT and the technology services portfolio. This comprises of the two listed subsidiaries, which is LTI Mine Tree and LTTS. The revenues of this segment at Rs. 121 billion in Q3 of 2025 registered a modest growth of 8%, largely reflective of the present market conditions. Despite the ongoing macroeconomic concerns and as I mentioned earlier, both these companies recorded very strong D wins in the quarter. The segment margin declined during the quarter is mainly due to wage hikes and forex losses in both these companies. I will not dwell too much on this segment as both the companies in this segment are listed entities and the detailed fact sheets are already available in the corporate domain. Next, we move on to L&T Finance. Here again, the detailed results are available in the public domain. But very briefly, I will summarize. The Q3 reward around healthy credit calibrated growth in the disbursements. The credit cost during the quarter was largely in check despite the ongoing headwinds in the microfinance portfolio and the balance sheet is strong on the back of built-in macro prudential buffers. The company expects credit costs in rural group and the microfinance loans to peak in Q4 FY25 and some normalization from Q1 FY26 onwards. The financial services business has achieved 97% utilization of its loan book in December 24, well ahead of the Luxia 26 targets. The return on assets remain healthy at 2.27% despite the sectoral headwinds. And finally, adequate capital in the balance sheet is available to pursue growth in the medium term. Moving on to the development project segment, this segment includes the power development systems comprising of Naba Power and Hyderabad Metro. Most of the revenues in this segment are contributed by Naba Power. A combination of improved PLF and higher energy charges in the Naba Power drives the segment revenue growth. At this juncture, let me give you some ridership statistics from the Hyderabad metro. The average metro ridership was 4.32 lakh passengers a day in Q1 FY25, 4.68 lakh passengers per day in Q2 FY25, and remains around 4.45 lakh passengers a day in Q3 FY25. The sequential decline in ridership was mainly due to the festive season holidays, during the quarter. Our ridership in Q3 FI24 was 4.44 at passengers a day. So on a Y on Y basis is lastly the same. The metro at a path level posted a loss of Rs. 2.03 billion in Q3 FI25 as against a loss of Rs. 2.54 billion in Q3 of the previous year. The improvement is largely on account of lower interest costs consequent upon reduction in debt. Moving on to the other segment, this segment comprises reality, construction equipment and machinery, rubber posting machinery, and industrial walls, and to some extent the residual portion of the smart world and communications business. The Q3 revenue at 9% growth over the corresponding quarter of the previous year was mainly contributed by a higher handover of residential units in the reality business and improved sales in the industrial machinery and the products business. The segment margin improvement is mainly due to a favorable revenue mix in industrial machinery and product business. Coming to the last part of my presentation, the outlook for the year, the revised outlook for the current year FI25, taking into account how we see Q4. Despite the initial hiccups, the Indian economy is poised for steady growth, with projections indicating a GDP growth of 6.8% for the fiscal year FI25. The rural consumption has remained encouraging, supported by strong agricultural performance due to a favorable monsoon. The services sector continues to be a key driver of growth. There are initial signs of a pickup in government spending post the center and various state elections, which will give the necessary impetus to the infrastructure capex spend in the near term. As the country strives to achieve the vision of a VIXIT-BARF by 2047, the government is expected to maintain its strong commitment to infrastructure investment, recognizing it as a key driver of broader economic growth. The forthcoming union budget is likely to strike a balance between policy continuity and fiscal discipline. The country would still be one of the fastest growing economies in the world, although the pace and sustainability of the growth trend would be shaped of how the country navigates challenges around global and financial market volatility, potential implications of intensified trade wars, domestic inflationary impulses, the compulsions around a coalition-led government, and finally a trade-off between social spends and pursuing long-term development goals. The global economy at the current juncture is at a crossroads, whereas policy changes by the USA could result in another drop of tariff costs. On the other hand, the ceasefire between Hamas and Israel should improve the situation in the GCC region. The European economies continue to move sideways, while questions over the Chinese economy further clouds the growth picture and put global economies towards fragmentation and localization. Further, we expect multiple countries to enhance their defense outplays in an uncertain world. The consequences due to climate change is getting serious attention and is leading to substantial investment outplays into cleaner technologies. Lastly, artificial intelligence and all its attributes and variants is gaining faster acceptance and adoption across the world. On a positive note, the GCC region, led by Saudi Arabia, will continue to strengthen its physical and its digital infrastructure, apart from monetizing its oil and gas assets. Coincidentally, multiple GCC countries have also embarked upon the energy expansion transition journey with relatively large investment outlays. In this economic backdrop, the company will continue to pursue its objective of a volume-led profitable and growth-accurative growth. The company has robust order prospects for the near term and is confident of maintaining its growth momentum by leveraging the emerging opportunities and maximizing shareholder value on a sustainable basis. Before we conclude, let me cover the guidance that we have given on the various parameters for the year FY25. First, order inflows. You will recall that we had given a guidance of 10% growth in order inflows for the year. For 9 months FY25, our order inflows at Rs. 2670 billion is up by 16% over the corresponding period of the previous year. and looking at a strong prospects pipeline of rupees 5.51 trillion for Q4, we believe that we would be surpassing the 10% guidance on ordering flows for FY25. With India expected to pick up in Q4, and since the international prospects pipeline also remains healthy, we feel confident of exceeding the guidance on ordering flows. As we speak, We seem to be well placed in orders in the projects and manufacturing segment of almost Rs. 500 billion. Coming to revenues, we had guided for a 15% growth in revenues for FY25. Since our group revenues for 9 months FY25 has reported a growth of 18%, and our order book remains strong, we do believe that there are potential upsides to the revenue guidance of 15% for the full year, FY25. Moving on to the EBITDA margin, our guidance on EBITDA margin for the projects and manufacturing businesses remain at 8% that we guided at the start of the financial year. This 8.2% is for the full year of FY25. On networking capital, we had earlier guided the NWC to revenue of 15% in March 25. Since our NWC to revenue is at 12.7% as of December, we believe that our networking capital to revenue should be around the same levels that we have printed for as of December 24. Lastly, as you are aware, our free cash flow generation has been robust in the last couple of years, and we are also stepping up our capital allocation into newer business areas like green energy, data centers, and semiconductor design. We do expect some of these investments to start contributing to group returns in the next luxury plan of the company, which will start from FY27 and end at FY31. With this, I conclude. Thank you, ladies and gentlemen, for the patient hearing. We will now begin the Q&A. My request to all the people who want to ask questions, in case you have any bookkeeping questions, please feel free to connect to me or Harish, my colleague, afterwards. We have with us also my senior colleague, Mr. Suparnam Sharma, who is the president and head of the energy business. Over to you.

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 touchtone 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. Our first question comes from Mohit Kumar from ICICI Securities. Please go ahead.