Larsen & Toubro Limited

Ladies and gentlemen, good day and welcome to the Larson & Toubro Limited Q1 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 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 Larsen & Dubrow Limited. Thank you. Hand over to you, sir.

Thank you, Darwin. Good evening, ladies and gentlemen. A very warm welcome to all of you into the Q1 FY25 earnings call of Larsen & Dubrow. The earnings presentation was uploaded on the stock exchange and then our website at around 6.30 p.m. As per the normal 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 same quarter in the next 30 minutes or so. And after that, I will be taking the Q&A. Before I begin the overview, the customary disclaimer. The presentation that we have uploaded on the stock exchange and our website today, including the discussions we may have on the call now, may contain certain forward-looking statements concerning L&T 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. I would request you to go through the detailed disclaimer which is available in slide 2 of our earnings presentation that we have uploaded today. To start with, the Indian economy continues to display a strong growth momentum despite the global headwinds. With the conclusion of the general elections in the country, we expect policy continuity going forward. The union budget for FY25 that got announced yesterday has reaffirmed the government's commitment towards enhanced public capex in the medium term. The central government budgeted capex at Rs. 11.11 trillion is around 3.4% of the GDP. Further, to promote state government capex spending, an amount of Rs. 1.5 trillion has been set aside as long-term interest-free loans. With a combination of improved domestic demand conditions, a good availability of bank credit, further backed by government's incentives for manufacturing, and finally with the election risks behind us, the stage is set in a way for a revival in overall capex in the country. The government budget yesterday also mentioned about promoting private investments in infrastructure through a viability gap funding and enabling policies and regulations. In our opinion, the union budget strikes a fine balance between prudent resource allocation and achieving fiscal deficit reduction at the same time. Elsewhere, the countries in the Middle East are continuing to focus on investments in oil and gas, infrastructure, industrialization, and energy transition. Before I get into the details, let me share some important highlights for the quarter. Two coveted global credit-taking agencies, the Standard & Poor's and Fitch, have assigned BBB Plus rating to Larsen & Dubrow. This rating, with a stable outlook, by both the two rating agencies is too nauseous about the country's covering ratings and essentially underscores the company's exceptional credit quality and robust financial health. Secondly, MSCI ESG Research has also upgraded L&T's rating from BBB to BBB on account of company's improvement in various parameters, including ESG. Thirdly, L&T Semiconductor Technology Limited, a only one subsidiary, has entered into a share purchase agreement this month for acquisition of 100% stake in Silicon Systems, a Bangalore-based company. This subsidiary has also signed a master collaboration agreement with Aditya Infotech, limited to develop and supply state-of-the-art systems on chip, that is SOC and other system solutions for CCTV cameras. Coming to the financial services business, that is L&T Finance, we are happy to report that the company has achieved, that is L&T Finance Limited has achieved a 95% regionalization as of June 24th of its loan book. The retail book and the retail disbursement for Q1-FI25 has registered a growth of 31% and 33% respectively. The company also reported an entity-level path at Rs. 686 crore for Q1-FI25 that has registered a 29% growth over the corresponding quarter of the previous year. I will now cover the various financial performance parameters for Q1 FY25. This quarter was a quarter of robust performance across the various financial parameters. Our group order inflows, revenues and SPAC for Q1 FY25 is up by 8%, 15% and 12% respectively. Our working capital to revenue, NWC to revenue, at 13.9% in June 24th, registers a sequential increase of 190 basis points, whereas on a Y&Y basis, it has improved by 310 basis points. Moving on to the individual performance metrics. Our group order inflows for Q1 FY25 at Rs. 709 billion registered a Y&Y growth of 8%. Within that, our products and manufacturing businesses secured aggregate order inflows of Rs. 544 billion for Q1 reporting a growth of 8% over the corresponding period of previous year. Our Q1 order inflows in the projects and manufacturing portfolio are mainly from infrastructure, hydrocarbon and the precision engineering businesses. During the current quarter, our share of international orders in the projects and manufacturing portfolio is at 40% as compared to 35% in Q1 of the previous year. During the quarter, orders were received across multiple segments, sub-segments like offshore vertical of hydrocarbons, renewables, transmission and distribution, roads, nuclear power, hydrogen and tunnels, ferrous metals, health and deep precision engineering business. Moving on to the prospects pipeline, we have a total prospects pipeline of Rs. 9.07 trillion for the remaining 9 months of this financial year as compared to Rs. 10.07 trillion at the same time in the last year. This represents a drop of around 10% on a Y-on-Y basis. This decrease is primarily due to a fall in the hydrocarbons prospects pipeline. The broad breakup of the overall prospects pipeline for the remaining 9 months of FY25 would be as follows. Infrastructure is at Rs. 6.02 trillion vis-a-vis Rs. 5.86 trillion last year. Hydrographic is Rs. 2.17 trillion vis-a-vis Rs. 3.48 trillion as of June 23. Energy power is at Rs. 0.45 trillion in and around the same as the last years. The heavy engineering and the precision engineering and systems businesses in aggregate have order prospects pipeline of Rs. 0.31 trillion vis-a-vis Rs. 0.25 trillion last year. The green energy business has started off an order prospects pipeline of Rs. 0.10 trillion vis-a-vis Rs. 0.04 trillion last year. Moving on to the order book. Our order book as of June 24 is at Rs. 4.91 trillion, up 19% vis-a-vis June 23 of last year. The production manufacturing business, since it is largely India-centric, 62% of this order book is domestic and 38% international. Of the international order book of Rs. 1.86 trillion, around 92% is from Middle East, 1% from Africa, and the remaining 7% from various countries, including of Southeast Asia. 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 at rupees 3.05 trillion, which I said earlier at 62% of the overall order book, is as follows. Central government orders share is 14%. State government accounts or state government contracts account to 28% of the domestic order book. Public sector corporations or state-owned enterprises have a share of 37%. and private sector at 21%. Approximately around 18% of this total order book of 4.91 trillion is funded by multilateral and bilateral funding agencies. Against this total order book of 4.91 trillion, 90% of that is coming from infrastructure and energy. The details of this are already there in the presentation slides. During Q1 FY25, we have deleted orders of Rs. 6 billion from the order book. And as of June 24, the slow moving orders is well less than 1% of the order book. Coming to revenues, our group revenues for Q1 FY25 at Rs. 561 billion registered a YMY growth of 15%. International revenues constituted 48% of the revenues during the quarter. The strong execution momentum in infrastructure, hydrocarbon and the precision engineering assistance within the projects and manufacturing portfolio enables the overall group revenues for the quarter. The revenue for the projects and manufacturing business for Q1 FY25 is at Rs. 386 billion, up 18% over the corresponding quarter of the previous year. Moving on to EBITDA margin, the group level EBITDA margin without other income for Q1 FY25 is 10.2% at the same levels as Q1 of the previous year. The breakup of the EBITDA margin business-wise including other income is given in the annexures to the earnings presentation. You may note that EBITDA margin in the projection manufacturing business for Q1 FY25 is at 7.6% as compared to 7.4% in Q1 FY24. I will come to details a little later when I talk about the performance of each of the segment. Our consolidated PAT for Q1 FY25 at Rs. 28 billion is up 12% over Q1 of 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 treasury investments in the current quarter as compared to the corresponding quarter of the previous year. And here again, the drop in treasury investments is largely due to the share bypass concluded by the company in the previous financial year. The group performance, the P&L construct along with the reasons for major variances under the respective function age is provided in the presentation. You may go through the same for further details. Coming to working capital, our NWC to sales ratio has moved from 12% in March 24 to 13.9% in June 24, mainly due to the build-up in the gross working capital during the quarter. However, on a wide-on-wide basis, the net NWC sales ratio has improved from 17% in June 23 to 13.9% in June 24. The group level connection that excludes L&D finance for Q1 FY25 is Rs. 459 billion as compared to Rs. 439 billion in Q1 FY24. This is a registering increase of 4% on a Y-on-Y basis. You may go through the cash flow statement as part of the annexures to the earnings presentation. Our cash flow from operations for Q1 FY25 as negative Rs. 5 billion vis-a-vis Rs. negative Rs. 9.9 billion in Q1 FY24. Finally, the trailing 12 months ROE for Q1 FY25 is 14.7% vis-a-vis 12.8% in Q1 FY24, an improvement of 190 basis points. The improved profitability with every passing quarter along with the return of capital to shareholders in the form of the buyback is contributing to this improvement. Very briefly, I will now comment on the performance of each business segment before we give our final comments. For infrastructure, coming to order inflows, this segment secured orders for Rs. 401 billion for Q1-FI25, largely flat on a Y-on-Y basis. During the current quarter, the orders were largely received in renewables, transmission and distribution, roads, nuclear power, hydro-land panel, ferrous metals, health and the precision engineering sectors. Our order prospects pipeline in infrastructure segment for the remaining 9 months is Rs. 6.03 trillion vis-a-vis Rs. 5.86 trillion during the same time last year. This represents an increase of 3%. The infra prospects pipeline of Rs. 6.03 trillion comprises of domestic prospects of Rs. 4.27 trillion And international prospects of Rs. 1.76 billion. The sub-segment breakup of the total order prospects in infra is as follows. Water and effluent treatment share is 20%. Power transmission and distribution including renewables is at 22%. Transportation infra 23%. Buildings and factories 12%. heavy civil infrastructure 18% and the share of minerals and metals, the residual 5%. The order book of this segment at Rs. 3.25 trillion as of June 24. The book build for Intra is around 3 years. The Q1 revenues at Rs. 269 billion registered a strong growth of 22% over the comparable quarter of the previous year largely aided by the strong execution progress across international jobs. Our EBITDA margin in this segment for Q1 FY25 is at 5.8% vis-a-vis 5.1% in the corresponding quarter of the previous year. The margin improvement is primarily explained by execution cost savings. Moving on to energy segment that comprises hydrocarbon and power. Hydrocarbon received multiple domestic offshore orders that enabled to increase its order book. The segment has a strong order prospect pipeline of Rs. 2.62 trillion for the remaining nine months of the current financial year. The breakup of this 2.62, hydrocarbon comprises rupees 2.17 trillion and energy power prospects of rupees 0.45 trillion. The order book for this energy segment is at rupees 1.18 trillion as of June 24 with hydrocarbon order book at rupees 1.13 trillion and power at rupees 46 billion. The Q1 FY25 revenues for this segment at Rs. 85 billion registers a healthy growth of 27%, mainly driven by execution ramp-up of international projects in the hydrocarbon sub-segment. Low revenues of power is largely reflective of a lower order book. The energy segment margin in Q1 FY25 is at 8.7%, vis-a-vis 9.1% in Q1 FY24. The hydrocarbon margin in Q1 is of current year, reflective of jobs in the early stages of execution, which is largely in line with our original plan for the year. The energy power margin improves on account of a favorable claim settlement accrued during the quarter. We will now move on to high-tech manufacturing segment that comprises the heavy engineering and the precision engineering and systems businesses. The receipt of shipbuilding order contributed to order inflow growth in the precision engineering and systems business, whereas heavy engineering business order inflow is largely in line with that of the previous year. The order book of this segment at Rs. 338 billion as of June 24. Our order prospects pipeline for the remaining 9 months in this segment is around Rs. 320 billion. Strong execution momentum drove revenues in the precision engineering systems business, whereas heavy engineering revenue was impacted due to a lower opening order book consequent upon order deferrals and jobs in the early stages. Coming to margin, execution cost savings helps the margin improvement in the precision engineering systems business, whereas heavy engineering margin benefits from a favorable job mix. Since we are on this heavy high-tech manufacturing segment, I would once again like to reiterate that the precision engineering system 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 of these munitions. The business also does not customize any delivery systems for such ammunitions. Moving on to the next segment, that is the IT technology and the technology services that comprises the two listed entities, LTI-19 and LTTS. The revenues for this segment at Rs. 115 billion in Q1 FY25 registers a modest growth of 6%. This is largely in line with the subdued global macro conditions impacting discretionary IT spend. Despite the ongoing macroeconomic concerns, the deal pipeline for this segment is healthy with a good visibility across all the sub-segments. The segment margin variation vis-a-vis the previous year is explained by a lower operating leverage. As both the companies in this segment are listed entities, the detailed fact sheets of the performance are already available in the public domain. We move on to financial services segment represented by NIT Finance, one of our another third listed subsidy. Here again, the detailed results of the company are available in public domain, but very briefly to sum up, the Q1 revolved around strong retail disbursement, improved profitability and better asset quality. Further, the balance sheet is strong on the back of adequate provision coverage ratios. L&T Finance Limited today is well ahead of meeting its Lakshya 26 targets. The retail good growth, asset quality and the return on assets are highly satisfactory. The business is building itself on the five pillars of growth, that is, enhancing customer acquisition, sharpened credit underwriting, implementing futuristic digital architecture, improved brand visibility and capability building. And finally, sufficient capital in the balance sheet is available to pursue the growth in the medium term. Moving on to development project segment, this segment includes the power development business comprising of Naba Power and Hyderabad Metro. You may be aware that the company on April 10, 2024, concluded the sale of its stake in the Earthwide L&T Infrastructure Development Projects Limited, which was a holding company that was engaged in the toll roads and the transmission line business. Coming back to the current quarter, the majority of revenues in the development project segment is contributed by Naba Power. The improved ridership in Hyderabad Metro and a higher TLF in Napa Power contributed to the segment revenue growth. Whereas lower interest rate expense in the Napa Power aided the margin improvement at a segment level. Some ridership statistics for the Hyderabad metro assets. The average metro ridership has marginally declined from 4.42 lakh passengers a day in Q4 FY24 to 4.32 lakh passengers per day in Q1 FY25. On a YMY basis, the ridership has improved. The ridership in Q1 FY24 was 4.22 lakh passengers per day. The metro at a patch level, we have consolidated a loss of Rs. 2.14 billion in Q1 FY25, vis-a-vis a loss of Rs. 3.35 billion in Q1 FY24. Moving on to the other segment, this segment comprises reality business, industrial walls, construction equipment, mining machinery, rubber coasting machinery, and a small residual portion of the smart world and communication business. The Q1-FI25 revenue decreased by 37% over the corresponding quarter of the previous year. This has largely contributed to a lower handover of residential units in the reality business. The sale of a commercial space in the reality business and increased sale volumes in the walls business enabled the segment margin improvement. Coming to the last part of my presentation, the outlook. India's domestic activity has remained resilient with manufacturing activity continuing to gain ground on the banks of strengthening domestic demand. The service sector maintained its buoyancy as evidenced from the available high frequency indicators. Private consumption is the mainstay of aggregate demand is recovering with steady discretionary spending happening in the urban areas. The revival in rural demand is getting a flip from improving farm sector activity. With an expected normal southwest monsoon, the tariff production is likely to get a boost and the reservoir levels likely to be replenished satisfactorily. With the union elections behind and the likely political stability, the government's continued trust on capex and business optimism over wealth or investment activity. However, the pace of infrastructure progress could slow down due to skilled labour shortage in certain sectors. The Indian economy is at an inflection point in its path towards greater transformational changes that will bring about more stability and growth. The Union Government project presented yesterday a detailed roadmap for the pursuit of a Vikesit Bharat by 2047. The budget envisages sustained efforts on the nine different priorities in order to create ample opportunities for all. Number one, productivity and resilience in agriculture. Two is on employment skimming. Three, inclusive human resource development and social justice. Four, manufacturing services. 5. Urban Development 6. Energy Security 7. Infrastructure 8. Innovation and R&D and lastly 9. Next Generation Reforms It is good to note about the government's emphasis on the all-round development of the eastern part of the country through the Purva Raya scheme. Plans will be hopefully will get formulated for the development of states like Jharkhand, Bihar, West Bengal, Odisha and Andhra Pradesh. Secondly, the government is also likely to facilitate development of investment-ready, plug-in-free industrial parks with complete infrastructure in a near 100 cities. Thirdly, promoting water supply and sanitation projects in partnership with the various state governments and multilateral development banks is the need of the hour. Finally, a policy for promoting pump storage is also in the works and since nuclear energy is expected to form a significant part of the energy mix going forward, There is a plan to develop small and modular reactors, nuclear reactors as well. Moving on to other part of the world, the global economy is expected to witness a rebound. Though the run-up to the US presidential elections in November can exhibit economic volatility. With the change of government in the UK and a hung parliament in France, the concern about European economic recovery remains. China's economic recovery remains a little lopsided with rising trade tensions threatening to overshadow growth in the exports. The central banks in the west are closely tracking inflation data and may announce a couple of great cuts later in the current calendar year. Also, regional conflicts remain continued as of now without having major adverse implications for the global economy. The countries in the Middle East, like I said, are continuing to focus on investment in oil and gas, infrastructure, industrialization and energy transition projects. Our wetlands continue to linger around geopolitical conflicts, supply chain disruptions and commodity price volatility. Amidst all of this, the LNG will continue to focus on profitable execution of its very large order book in the background of a relatively stable environment. It is well-positioned to exploit the emerging opportunities across its diversified business portfolio and limit its exposure to non-core businesses. The company remains committed to maximizing sustainable value to all its stakeholders. Thank you, ladies and gentlemen, for the patient hearing. We can now commence the 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 1 on their touch-tone telephone. If you wish to withdraw yourself from the question queue, you may press star and 2. Participants are requested to please use handsets while asking a question.