Larsen & Toubro Limited analyst Q&A

We will now begin the question -and-answer session. First question is from the line of Mohit Kumar from ICICI Securities. Please go ahead.

So, my first question is on the GCC tenders. I think last year Middle East surprised us. How do you think about the Middle East opportunity in FY '25 compared to FY'24? And do you think there is a more headwind compared to the last year?

Difficult to predict today very clearly as to where the situation will be 12-months forward. Our belief is that the investment in Middle East will continue. Unlike the previous years, the investment in Middle East is more broad -based. It's not only Hydrocarbon, it's also into Infrastructure building and developing Middle East as a destination for varied tourism, be it religious tourism, be it medical tourism, be it just entertainment and otherwise. So, between the infrastructure they need to build and the energy that they need to generate for the infrastructure and also the downstream investments that they do in petrochemical and related areas would see continued thrust. What could change, perhaps, is prioritization of investment. We need to see as to which are those which are fancy investments, which are those must have investments. And to that extent we have factored that into our guidance. On the back of a 30% growth in order inflow, we are guiding about 10% , n ot only because of the disruption that we are expecting in the domestic markets bec ause of elections and new government formation related issues, but also because of the fact that Western Asia is geopolitically very sensitive. We have US elections coming in. We do not know how the relationship between US and Israel will form out, how the equation between Iran and the US will form out, and there are too many players in the act. So , considering all that, as compared to almost 1,80,000 crores of orders that we have booked in the current year for Middle East, we are looking at a reduced level of maybe 1,50,000 crores going forward from Middle East. The overall investment, I don't expect it to lose steam, but there could be prioritization.

My second question is on the working capital for this particular fiscal year, there is a dr astic decline. Is it to do something to with job mix, is it temporary and where do you see this number in medium-term?

See, when it was sticky, around 24%, 25%, 26%, we were worried because the margins that we were generating was not suffic ient to generate returns. We do believe that the working capital going forward has moved for good from those 24%, 25%, 26%. Whether they would stay at 12% or move in a band of 12 % to 15%, we'll have to wait and watch, but my guess is that a lot of those legacy outstandings which we went after very aggressively and collected successfully has led to the decline in the working capital. I do not know whether you remember, but in 2007 , 2008, etc., we used to report working capital at 7%. So, I think it's very, very dynamic in relation to the type of projects and the terms under which we sign those contracts. My belief is we should be able to work around 15% . If 12% is not sustainable, so be it. But I don't expect it to go in north of 20%. So , at the momen t, we would be quite okay, we'll accept if we get about 15% working capital increase and that's the reason why we have even guided around 15% towards working capital in tensity. In terms of efficiency, I think it is well drilled down into the organization that you have to spend out of cash that we collect. It's a transformation that we have achieved in the organization which has taken us about three, four years of effort to make the sides believe that they will have to collect to survive, and they just can't make phone calls to get cash from the headquarters. I think this cultural shift has happened and to my belief is that this will sustain going forward.

The next question is from Renu Baid from IIFL Securities. Please go ahead.

My first question is while in the margins you have broadly guided for flat margins in fiscal '25 for all the reasons of mix and backlog, etc., but does that also mean that now given hydrocarbon and Middle East has been over a third of the backlog, so not just '25, but from a medium term perspective, two to three years, our margins could be in the similar range sub -10% level versus the historical levels that we've enjoyed of 10%-plus?

Renu, for a EPC business, 10% margin is outstanding according to me. You can look at all the global peers, they nowhere are near these levels. So, I will any day happily take if the business is going to generate a 10% margin on a consistent level. The needle mov er has been the construction business that we have been operating. And in infrastructure business, unfortunately there are several levers that play which influences the margin. Our own belief is that we should be able to have a plan to improve the current margins of infrastructure business, which is about 6.2% to about 7% level. Whether it happens in one shot or whether it happens over two years in stages, we'll have to wait and watch, but we do think that the margin improvement would be largely driven by t he improvement that we see in construction business rather than in the hydrocarbon business.

And the margin guidance excludes claims settlement for the large mega projects which we have been completing or commissioning in the recent times?

We have realized the hard way, Renu, that it's difficult to predict the customer's response in terms of these claims settlement. They go through extensive discussions. It also has something to do with the budgets that they have had for getting the projects approved. So, the processes involved are unfortunately little time drawn . So, my guess is that as and when this happens, we could report some improvement in margins, but hard to predict a timeline. But at the moment the margin guidance excludes anything which is of significantly deviant nature.

Secondly, on the Hyderabad metro, while the ridership and overall performance has improved, where are we in terms of unlocking value in this asset and bringing private equity investor , do you think it could be on car ds in the next 12 to 18 months or could be beyond the current start plan?

As they say, we need to dress the bride up. We need to get the fundamentals a little better organized in Hyderabad Metro. I think the traffic is punching below its weight. The traffic has potential to go up to 5.5 lakh crore, or 6 lakh crore or thereabouts in that range. So, to an extent, about 100,000 people more than what currently are using metro should use. But we should also realize that this is something transformational from Hyderabad. Hyderabad never has had a metro. The only way people used to travel apart from their cars is autos or buses. And these modes of transport are often subject to some political maneuvers. The current government has announced free passage to women travelers. So, that's taken about 40,000-odd people from our traffic from Hyderabad Metro. So, we need to wait and watch as to how these dynamics play out. But my sense is that Hyderabad Metro has potential for improved ridership. It obviously has pending work in terms of getting government grants completed in terms of the Rs 3,000 crores that they granted and we've just drawn about Rs 900 crores out of that, and the balance Rs 2,100 crores has to be d rawn. And thirdly, I think the monetization has just started . As you might possibly know 18.5 mn.sq.ft. is available as real estate . Not all of them is monetizable on day one, but in phases the monetization will happen. And the fact that the government has agreed to monetization is borne out by the fact that during FY'24, we did monetize and report some gains out of that monetization. So, that effort has to continue. My own assessment is it will take a good one or two years for us to get the project into an attractive zone. Investor s will invest in this project if they see potential to earn about 12% on a consistent basis. We are , in my opinion, at least 18 to 24 months away from such an event.

While the rest of the guidance on process has progressed well, is the divestment of the thermal project Nabha still on cards or given the outlook of thermal assets today, we may retain it slightly longer than initially planned?

See, the good news is it's not hurting us holding. Of course, the returns will be better if the assets get unlocked. So, we don't want to throw the baby with the bathwater. We just want to make sure that the unlocking that we do, as and when we do, is done with appropriate valuation. So, we are waiting. My own belief is I think coal i s still relevant in the relevant scheme of things in India. I don't think we can do away with coal completely. So, there will be some consolidation of coal assets and Nabha will be an asset worth acquiring by such of those sponsors because it's a performing plant, almost 85% PLF, 25-years concession agreement, steady payment terms, the coal supply chain is well established now and the unit is generating Rs 4,000 crores of revenue and Rs 400 crores of profit on a year-to-year basis. So, according to me, anybody who has a coal portfolio will be better off having this asset. So, we will wait for the right bidder and choose as and when it happens. But at least it doesn't hurt us in terms of loss being generated on a year-to- year, etc., So, Nabha asset is available for monetization but at the right price.

The next question is from Parikshit Kandpal from HDFC Securities. Please go ahead.

So, my first question is on the Rs 1.8 trillion GCC orders which you highlighted earlier. So, are all these orders like financially closed, has the notice to proceed given, is there any slow-moving orders in this, if you can give some more color on this part of the order book?

So, these orders are well and truly moving. I think none of those are subjected to uncertainties of the kind that you're alluding to. These are orders, just won. So, I think the progress of the orders over the next 24, 36 months will determine the final outcome on these projects. And most of these are funded by the Saudi PIF which is as you know is pretty cash rich. And the solar projects that we do are financially closed, whatever that we are embarking on. We have close to 18 GW of solar orders in Middle East. No t all of that is part of Rs 1,80,000 crores that I speak about, but some of which has happened in the earlier year and some of which in the current year, most of them are financially closed. The proof of the pudding is that we have been able to collect our dues as and when we bill. So, I would like to believe that they are in good place.

Just a second question on the order inflow growth of 10%. So , if you can help us understand how are you looking for the growth in export orders and the domestic orders, some color on that will help given we have such a strong inflow of Rs 1.6 trillion for FY'24?

We speak about prospect of about 12 lakh crore in terms of orders and roughly ballpark I'm speaking, about Rs 7 lakh crore could be dome stic orders and about Rs 5 lakh crore could be international orders. Now our Rs 1,80,000 crores that we won in the current year out of the 3- lakh crore of orders could possibly be based on our current estimate around 1 .5 lakh crore. So, to some extent, if you just compare period -to-period, we have factored in some decline in the international orders, but that gets compensated for by the step-up in the domestic orders. We do believe that the economy has benefited by the investment f irst approach and the tax collections bear testimony to this policy of investment first. So, I guess post elections when the new government comes in, they would pursue with this policy. If this happens, the relative decline that we have presumed in our next year’s budget for order inflow could get compensated by the domestic orders, and consequently, we think that overall growth of 10% can be met. Well, as things pan out, the ratios could change depending on the current development because this is as we could see today. Now, how things move out in terms of West Asia and how things move out in terms of India etc. , we will have to wait and watch. Big events are at play . U.S. election is a major event that will have an implication on the West Asian geopolitical developments, so is Indian elections. So, at the moment our best estimate would be that a 10% growth given that 3 -4 months will go away in the current year just by ge tting the government re-elected and repositioned . Followed by some monsoon months , we do think that the action would be in the second half of the year, and hence, the guidance is on a very large base of 3 lakh crore, a 10% increase. But my sense is that there would be a decline in international orders and could get compensated by domestic orders.

Sir, j ust on the real estate piece, we are in a super cycle on real estate. So, v ery limited information shared by L&T. And this has been a big value creator for a lot of companies in the listed space. So, just wanted to understand on Real Estate, if you can help us what was the pre- sales or the new sales booking for FY’24 and any plans, any sense directionally on FY’26, what potentially growth we are looking at because this could be a big value driver for L&T?

You are right. I think it is a good value driver and it is always good to have some cards up your sleeve, right, for overall value accretion. So, I do think that this is one of those. For FY’24, we have booked fresh orders worth about Rs. 4,500 crores. Close to about 2,000 apartments we have been able to sell largely from residential even though we are also developing 15 million square feet of commercial area. Part of the commercial area is for our own expansion and use and part is for divestment and sale on development. You might have heard or read about the fact that we have tied up with CapitaLand for the commercial real estate which is meant for third party use. So, on construction completion and OC being received, these real estates would be monetized. The idea is to unlock the capital and recycle in the real estate business. On residential, I think the demand has revived and the demand for high -end apartments have also revived very well. Today we find that in markets like Mumbai, Bangalore, maybe a bit in Chennai and a bit in Hyderabad, a bit in NCR region in Delhi as well as in Pune, these are markets where we are seeing a lot of traction for residential apartments . We have projects in Mumbai, Bangalore, Chennai and NCR, Delhi . We don't yet have in Pune. But we think that based on the nearly Rs 3,000 crores worth of revenues that we have earned in FY’24, we should be heading towards growth both in terms of fresh order booking as well as sales. I must hasten to add that the sales in real estate business is on account of apartments handed over and not on the basis of work in progress in terms of construction progress. So, the apartments handing over has got a big issue to be resolved which is approvals by the local authorities and occupational certificate being given. It is a very bureaucratic area. So, we find it often a challenge to make sure that the pace of approvals are in sync with the pace in which we are able to complete the projects. But our guess is that we will be able to improve on our sales realization of Rs 3,000 crores for FY’24 in FY’25 and profits are actually consequential flow through. So, we do believe that both in terms of order inflow and in terms of sales and consequently in terms of cash flow and profits, real estate will do well. Whether we are ready to list these entities, we will have to wait and watch, because I think we are very conscious about our reputation. The minute we list, we have to make sure that it is a repeatable and sustainable business model. We will have to wait and watch as to how this progresses. But I do believe this is a gem available to be unlocked in the portfolio.

But new order bookings by FY’26, any sense how this 4,500 could move like in next 2-3 years? Can it touch a 10,000 number internally? I mean, any numbers you are targeting?

It is difficult to put a number of that magnitude because all this booking will have to come from projects that we are executing, right? And today, there are finite projects that we are executing. The difficulty in projecting a order booking number is that we don't sell until we get the clearances. I think we are very conscious of the fact that we have a reputation to protect. So , unlike many players in the real estate entity, we just don't book and then cancel later. So , my sense is it will all depend on the land parcel. It will depend on whether it is a slum rehabilitation project or a clean piece of land. It will also depend on the approval processes that are involved. So, my guess is that you can at the moment take it as a growth area, but whether it will reach Rs 10,000 crore by FY’26, hard to predict. We will not resist if it is going to get there, but we possibly might need luck to be there.

So, it is the last question on this entire UMPP revival. So, any plans relook at undertaking Capex to cater to the upcoming bidding or the capacity addition?

Which is that revival?

UMPPs. The power plants.

Ultra Mega Power Plants. Okay. See, at the moment, I think we have not retained our focus on coal-based power plants for a couple of reasons. One is obviously, we think oil and gas and the green energy has a better future. So, we are putting our bets there. And secondly, the terms under which these contracts are available for ultra mega are not necessarily very EPC friendly. If I take those orders for the sake of order booking, you will question me on my working capital efficiency and margins arising there from. So, I need to balance the opportunities that are available in UMPP area and in the rest of the area. My own belief is I think we are far away from taking coal away from the equation of energy generation. Coal will continue to exist. The choice is whether we would like to be there or we would like to be in some futuristic areas. We have chosen to be in fut uristic areas. So , to that extent, even if UMPP revives, I think we would not necessarily rush into that space. Once bitten, twice shy.

Thank you very much. We take the next question from Aditya Bhartia from Investec. Please go ahead.

So, just to kind of confirm, w hen you are speaking about power sector, it means that we are largely going to stay away from ordering and which kind of gets reflected in your prospect pipeline that you also spoke about being only around 0.5 trillion for the power sector. Is that understanding, correct?

You are right.

Sir, second question on our order in flow growth that has been built into for FY’25. We are expecting a decline in international orders, which means that despite elections which can potentially impact H1, we are building in almost , let's say, 13-14% kind of growth in the domestic business. Even in FY’24, we estimate that overall ordering in the economy is likely to have remained strong. It's possible that L&T lost out some large orders maybe because of competition. So, what are we really seeing as changing in FY’25?

See, I think we do believe that the system has realized that successful completion of a project is equally important as finding the right price for the project. We used to be very L1 based in our approach for some of these projects. As the project scope enlarges, I think it is important that the quality-based cost selection process that the government has accepted should start playing out. Because today, whether a person is capable of delivering or not, he is free to bid for projects and upset the commercial considerations. I think the government has also realized that it is paying a price by the delays that keep in. My own belief is that 25-30% of the infrastructure cost that the country is incurring is on account of project delays by backing the wrong horse. If India is going to move towards Atmanirbhar, and if India is going to, let's say, take advantage of the US-China relationship, which means that there is an alternate source of manufacturing, apart from Taiwan, apart from Korea, etc., then India has everything going for it. So, one of the prerequisites, I would believe, if the new government seriously looks at economic development of the country, would be to make manufacturing competitive. And if this has to happen, then it is important that the cost of infrastructure that we develop is competitive. Because if infrastructure cost is uncompetitive, then the rest of the things falls off. So, my belief is that the selection criteria will take into account the projects that we completed. Now, largely, if you see in the last six months or so, many of the marquee projects that the country has launched involved L&T standing there and completing the project. So, my own belief is that there could be some selection criteria that will come in play, which will help us get a little more market share than what we had done in the past. Secondly, we ourselves, because the bandwidth is getting stressed, L&T needs to make sure its resources are deployed for the right project and not get locked up in smaller projects. We will also get to be more selective and look at larger projects. When we look at larger projects in terms of order inflow, the spike takes care of the percentage growth that we are speaking about. It matters to me that I win lesser number of jobs, but each job being of a larger value as compared to the past, where we have to compete w ith every Tom, Dick, and Harry. So, in a way, we are trying to run ahead of competition and create a niche for ourselves in this entire area of construction and project development. The investments that we are doing, which is all seen in terms of some portion of our margins getting sort of compromised in the current term, is also on account of creating this competency. Let me give you an example. In the area of Water & Effluent Treatment, we have invested money in creating a completely global standard l ab by employing doctorates and PhDs who have worked on water technology for many years. Now, all of this is to ensure that the water project that we undertake has the benefit of their insights in terms of the quality of the water, the extent of corrosion, the type of pipes that we need to use, and the geography that it needs to take. So, given all of this, unless I invest upfront in these technologies and labs, it would not be possible for me to be quoting appropriately whenever that order comes. A company which has none of these will land up quoting for it on a standard basis, and they will land up losing money for the government and for themselves in the long run. So, my belief is that the lead that I might establish in the domestic infrastructure could happen because of the scope and scale of projects and the technology that we would bring to play.

Just one follow-up over here. So, L&T has always enjoyed this reputation of undertaking these complex projects and execut ing them well ahead of time and with great quality. So, nothing really changes over there. So, the main thing that we are speaking about changing is the selection criteria. And is there any particular vertical or segment wherein we are anticipating these changes from the government side?

Yeah, I think if you look at what the government is trying to promote, it is promoting in a very broad manner inclusivity, which means what? It wants to take projects and employment prospects to different corners of the country. Now, before it does that, it has to make sure that the people there have access to education, have access to basic sanitation, water, electricity, et cetera. And it also enables them to actually be engaged in the local industry. So, my own sense is in sectors like roads, it may not make much difference , because you will have enough number of contractors available locally who can just get a road done. The government today, whether it is State or Central, doesn't seem to worry much about the quality being L&T quality, because I think they have yearly budgets to take care of maintenance, repairs, etc., etc. So, we are sort of really defocused from those normal roads and we are getting into little more sophisticated areas. Now, if you see expressways that get developed, if you see the railroad that gets developed , be dedicated or high-speed rail, now these are areas which have huge economic significance to the country. So, my own sense is that selectivity will come where technol ogy is at play and not necessarily in areas like roads. For example, if it comes to distribution of scarce resources, and let me again go back to water, I think today’s country is not necessarily comfortably placed in water, even in a normal way of speaking. I think we are water stressed in many areas and much of this reason is also because of leakage, pilferage, etc. So, we need to have a distribution system which is foolproof, both in terms of quality of transmission of water as well as tracking the los s in transit. So, we are combining technology in terms of our own water detection, leakage technology as well as robust distribution system. So, my sense is some of those which are funded by multinationals will be the first ones where quality-based selection will happen, followed by something that happens in the Central Government followed by Local / State Government. State Government will be the last to join queue because they have constituencies to please. So, consequently, they can't be necessarily only quality driven. They also have to take care of their own considerations. So, multilaterally funded first, followed by central government programs, followed by state government programs is where this selectivity will happen.

Thank you. The next question is from Amit Anwani from Prabhudas Lilladher. Please go ahead.

My question is with respect to the new initiatives which we talked about, we have done one electrolyzer, alkaline -based electrolyzer project in Hazira, and we jus t talked about the semiconductor fab lab. Wanted to understand the investments required here for capacity creation, and any investment done so far, and when can these new initiatives including data center can contribute meaningfully to the revenues over the next 2-3 years?

The current electrolyzer that we manufactured and sort of put out in December '23 is undergoing several tests for their functionality, because we need to make sure that we have a product which is global in standard. And this is the first time ever anybody in India has put a technology, I mean, electrolyzer based on alkaline technology. So, we are trying to do that. Now there is an alternate technology called PEM technology and we are also trying to explore PEM technology, as to how it works. Because end of the day, hydrogen as a source of fuel will catch on only if it is competitive. So, we have to bring the cost of electrolyzer down so that we bring the cost of hydrogen down. My own sense is that it will take a year more for us to crack this code and be able to indigenize sufficiently the components of electrolyzer. The electrolyzer initially that we have made has fair bit of imported component. Those need to be sourced indigenously, for which we wil l have to develop a supply chain. My assessment is that during 2024-25, we will start manufacturing a few more electrolyzers. We already have an order on hand for an electrolyzer which is under work in progress. But we think that there will be many more to follow, provided we crack the cost competitiveness equation. In so far as Data Center is concerned, I think we have launched the Panvel data center, which has about 280 racks. We are trying to find customers for those 2 MW pilot Data Center. You might have heard or spoken to us earlier. We are also in the process of building a 30 Megawatts Data Center in Kanchipuram in Tamil Nadu. And the idea is that we should be able to get some customers including hyperscalers to use these data centers. Our plan does include another 40 MW between Bangalore and Mumbai of additional data centers. So, the plan is fairly large and the 32 M egawatts of data centers that we are at the moment working on is possibly about Rs 2,200 crores of outlay. The additional 40 megawatts that I spoke to you about will involve further outlay. But the utilization of these data centers and the type of clients that we get will also drive the extent to which we feature the construction of the data center. The specifications are very user- based, user-dependent. Hypers calers would require at a certain specificity and others would require at a certain other specificity. We also are not looking at these as just co-location centers. We are looking to provide cloud services on top of this. So, the value add that we will g et is only when you have hyperscalers working and hyperscalers working out of our premises would mean that the features of the data center we construct appropriately meet the requirement. So, the capital allocation will be well met by the cash flows that we have in the company. It is not expected to force us to borrow to meet these capital expenditures but would actually depend on the type of customers we sort of sign up with. Electrolyzer, we want to increase the 1 MW to 4 MW capacity because each electrolyzer is a bulky equipment and we are not able to visualize somebody who wants to put electrolyzers of 10 megawatts, 20 megawatts doing it in multiples of 1 megawatt unit. So, we are trying to do some nano versions of these with increased capacity. So, it is work in progress and the amount we might be required to invest would depend on how these initiatives span out. We have invested about Rs 25 odd crores for the current electrolyzer that we have put up. So, it is not very capital intensive, but it is not very efficient. So, we need to crack and improve on the efficiency and the sizing. Maybe a few months or a few quarters down the line we will be a little better placed to assess the capital requirement of this.

So, my next question is on Hyderabad Metro. You did highlight that at least 40,000 ridership got impacted because of the free woman scheme. I think that now would not be there for at least next two to three years. So, is that going to delay our restructuring plan in Hyderabad Metro? And second thing, wanted to understand the Rs 2,500-crore interest free loan, which we were supposed to get as a part of restructuring and refinancing, is that on track? And third, what kind of monetization amount we are expecting in FY’25? This year I think it was about Rs 1,050. So, what could be the number next year we are expecting?

More women on the buses we believe will get more men on the train. It is a bit of a gender divide but can't be helped. Because I think the way I read it is the Telangana government is not increasing the bus fleet. It is the same old bus which is ferrying all of them. So, women crowding means no space for men. So, men have to go and find alternate space and I hope they find that in our metro. So , to that extent the 40,000 going away could mean 40,000 more men coming into trains. Time will tell. Secondly, in terms of the balance, it is not Rs 2,500. We almost have to get 2,100 crores of money from the Government. You know, the government has changed. So, to that extent it does, and it is followed up immediately with the Union election. So, at the moment, I think the entire machinery is on election mode. So, the environment is not conducive for us to sit down and talk commerce. So , we will wait for this election event to be over, and we will engage with the government. We are currently engaged with the bureaucracy, but you know in State Governments nothing happens without the political bosses getting aligned to the bureaucracy. So, I guess by August and September we will have a better color of when we want to realize. Our idea is to realize this as early as possible because when the government passed the order last year , they meant to disburse this in three installments of Rs 1,000 crores each. The first installment , they had done Rs 900 crore, stopped short. So, we have a hundred more crores to collect out of the first installment. The second year has commenced. So, another 1,000 crores is due. So, all going well , we should be able to get Rs 1,100 crores now and Rs 1,000 crores in the following year. In so far as monetization is concerned, as I mentioned, 18.5 million square feet is available. Not all of that is monetizable on day one. We have monetized up to about Rs 1,000 crores. We do think another Rs 1,000 crores is up for monetization. Again with the government playing supportive role, we should be able to get this Rs 1,000 crore into our monetization program during FY’25, and hopefully it will be done for similar profit as we had done in the earlier case.

Thank you. Next question is from Sumit Kishore from Axis Capital. Please go ahead.

My question is in relation to your core margin performance clubbed over a period of nine quarters. So, we look at nine quarter period together . We see that L&T's ability to predict or guide on core margins is below historical track record. So, with the benefit of hindsight, how do you view, you know, what is it that you have not been able to foresee better while guiding over the last two years plus?

See, we could not predict COVID . We could not predict Russia -Ukraine war. We could not predict Israel-Hamas. We could not predict Iran-Israel. We are not able to predict whether Trump will win, or Biden will win. We are not even able to predict whether Modi will win or somebody else will win. There is so much uncertainty around our life. Now I am not even talking about the commodity price, I do not know whether your research put out that the steel price will go up to Rs. 80,000 per metric ton. It moved up from Rs. 30,000 to Rs. 80,000. Silver and copper and aluminum shot through the roof. So, with so much of uncertainty, unfortunately our business model is we sit today and look four years forward and say where the cost would be, where the revenue would be. And given that we deal with execution on the ground, which means that we have to mobilize resources, we have to get imports or local supplies done, the supply chain has to work to our plan , and the resource mobilization overall has to be in line . We should get the clearances in time . The land, right of way, land acquisition to be done in time. I think in hindsight, I really wonder how we got into this business with so much of uncertainty and I also wonder how we have been able to be so consistent in our delivery over time. You might possibly say that margin prediction has moved up and down, but if you take our company's performance over the last 20 years, we run a portfolio of business which sort of self- compensates. Hardly has there been a cycle which is linear. We have had cycles of ups and downs, at least four economic cycles, very distinct. I am able to recall my 20 years here. Given this, I do believe that we have reasonable expertise in trying to get the margins profile predicted out of the jobs that we have to execute going forward. There has always been a challenge of 100 basis points and as an analyst, I think every basis point counts for you. But my sense is so long as we are within the band of 1% up down, I think we have done a reasonable job given the uncertainties that feature our daily lives.

Just to clarify one point you had made earlier regarding 80 basis point likely core margin improvement over next 2 to 3 years as you go from 6.2 % to 7%. Given that this is the largest segment, would you have a gauge that the extent of Projects an d Manufacturing margin improvement over the next 2 years should be of a similar magnitude?

See, the improvement in Projects and Manufacturing would depend on the type of orders that we get. For example, if we are able to get large orders in the Precision Engineering & Systems area, typically these are very high entry barriers, high on technology, low on competition and margins would be pretty good. Now, if we are able to get some large orders that we have been targeting for the last few years, and for whatever reason government has not been able to make up its mind between public sector ordering and private sector ordering, if government really wants to push Atmanirbhar and reduce dependence on imports for some of these Precision Engineering & S ystems orders, then we could see the improvement in margins in the manufacturing portfolio as well. The improvement in margins in the Infrastructure segment, essentially the construction and project management, has to come not necessarily from client giving us better prices, but us doing the work in a more efficient way. We have to figure out a way to crash time overruns. We also have to figure out a way to make sure that the cost estimation is very realistic, and we have back- to-back arrangements with our supply chain. The productivity of workforce is the only uncertain element in this because every year, as you possibly might have heard earlier, almost 400,000 people, workers we employ, source from all over the country and there is at least three times this 400,000 churn. So, we need to operate on a pool of 10 to 12 lakh people to make sure that we are able to deliver our projects on time. Now, every person comes with this unique advantages, disadvantages, skill sets, etc. To achieve the consistency that we desire, if margins have to be on track with the expected trajectory, would require for enormous automation and that doesn't happen overnight. We are doing our best to make sure that we invest in automation, reduce the inside construction as much as possible and make sure that we deliver more consistently on our projects and productivity. It's a journey that we have undertaken. We do realize that we want to create sustainable value as a company, which today is about $25 billion, $27 billion. If you want to become $50 billion, $100 billion company and continue to be as valuable, it is important that we are able to get larger level of automation and reduce the uncertainty in our execution. So, it's an effort . We are cognizant of that , and I think we are at it , and hopefully, over the next few years , you will progressively see the improvements.

Thank you. The next question is from Atul Tiwari from Citi. Please go ahead.

Sir, my question is on a thermal power opportunity, and you alluded to it , but what exactly is keeping L&T away from this opportunity? Because you have both the EPC as well as the BTG manufacturing capability and the government is talking about 80 GW or so of orders over the next few years which could be pretty substantial.

See the terms of trade in thermal so far as the experience go has not been very contractor friendly. The thermal capacity is largely being added by PSUs today. The private sector is not really investing and such of those private sector which is invested in thermal capacity is in front of NCLT. So, given that PSU is your client , there is a bit of an unevenness in the commercial relationship. You can define only that many terms that you can foresee in a contract. Let me contrast it with the experience that we have with Middle Eastern contracts. Now , there also it is inconceivable to have everything predicted upfront, but as the project gets implemented, we definitely sense a certain amount of support that the sponsor provides to make sure that the project gets completed on time. Unfortunately, in Indian conditions, there is no penalty for delay, but there is penalty for decision making by private sector enterprises. They are scared about taking commercial calls, which is just outside the four walls of the contract that we sign up with. But project business does not work exactly on the printed contract lines , because there are dynamics that are at play, and which makes us deviate from the contractual situation. So, if the client is interested in completing the project and he is going to be evaluated for completing the project in time, which is not the case with our Public Sector Enterprises, then they will do everything to make sure the contract completes. Here we find the situation that let me see how you complete, or I will see when you complete seems to be the attitude. Now that doesn't work with us. I think we have become a large company, and we have investors who expect us to become even bigger and that can happen only if we climb the right ladders. A thermal, coal-based power plant with PSU as a customer does not at the moment seem to be the ladder we can climb. There has been considerable improvement because it has now got reduced to a situation where in many of these projects there is single bidder, and the very government system does not support single bidders. So, they badly require somebody like L&T just to make sure that there is a seco nd bidder. We don't want to be dragged into this situation. We want to be participating in a bid if we have a right chance to win and we have all the interest in executing. If we are going to just be counted for just numbers sake, that's not our interest. So, considering all this and considering the alternate opportunities we see, end of the day, I also have limited resources and limited bandwidth. I need to deploy my resources and bandwidth in areas which I think will produce value for my investors, and that can happen only if I follow not on emotive grounds but on rational grounds on which projects I bid for , and that actually eliminates, I wouldn't call eliminates, it reduces the coal-based power plant much lower in the priority.

Thank you. Next question is from Aditya Mongia from Kotak Securities. Please go ahead.

As in two parts to my question , the first one being when you say a 10% growth against a 12 trillion pipeline, it kind of assumes that your hit rate will be more than 20%. Could you give us a sense of segments where you think you would be able to do this kind of hit rate or even better? That's the first part. The second part is, again, we are relying on domestic order inflows to grow next year. Are there certain large size programs such as Petchem that you are relying upon? Some more color would be useful. Those were the questions. Thank you.

See, this pipeline in a way is an aggregation of opportunities that we see today. We find that roughly about Rs 7 lakh crore out of the 12-lakh crore comes from India, Indian opportunities. About 5 lakh crore from international opportunities. And in Indian opportunities, predominantly it comes from infrastructure space. Areas like water which we think requires substantial investment , area like the civil projects where a fair bit of large projects in urban transportation, the bridges infrastructure in the borders et cetera are involved will get government allocation because of the preferences . Whether it is political preference or security preference, the preferences exist. The standard growth momentum in areas like our buildings, factories area, in our power transmission distribution, those or any of the industrial CAPEX, they remain encouraging, but could change between one timeline and another timeline. So, our sense is that, given a 20 %-25% win rate, if we are able to actually participate in bids worth 7 lakh crore in the domestic order, we should be able to clock in somewhere between 1.5 lakh to 1.8 lakh crore, which is what we are seeing. In the year that we have just reported, we are close to 1.5 lakh crore of domestic orders and that would possibly become 1.7 -1.8, maybe 15% crore. On international, we have deliberately reduced the target. We don't know. It is not that we will let go of opportunities. But we do think that considering Saudi, which is a very large component of our international market, has gone on t o some investment prioritization mode and not necessarily slow growth mode, but they just want to prioritize the investment to the purpose that they cater to. So, given that, we have said instead of Rs 1.8 lakh crore, we will possibly target about Rs 1.5 lakh crore in the current year. But these are not cast in stones. I think we will have to keep watching this space and see whether the bids play out accordingly. Our own belief overall, given the 3-lakh crore large base that we have set for ourselves at the end of FY’24, 3 lakh 30 could be something that we will reach. But in terms of how much of domestic, how much of international, which sector, etc., we will keep talking to you as we go along the quarterly conversations.

If I may, just 3 years back, the hit rate was about 15% on an overall basis, which we expect to go to kind of 20% plus. So, I am just trying to get a sense whether certain sectors' competitive positioning has improved or the competition by itself has kind of scaled down fo r us to be confident of 20%-25% hit rate on an overall basis in domestic.

See, I think the competition exists at the lower end of the project spectrum. I think you yourself would have sort of seen that the kind of projects now they are b idding, participating, and executing are far more complex, both engineering -wise and scale -wise. I mean, just take the most apparent example of Trans Harbor, 21 kilometers across the sea or coastal road, the kind of challenges, technical challenges that we have, the considerable amount of tunneling that we are doing for Metro or for coastal road is obviously reduces the number of people who are competing. The eligibility is lower. Not to say that there won't be any competition. There will be competition b ecause the sponsors would like competition for better price discovery. But instead of 10, 12, 14 people competing, we are increasingly looking at projects where 4 or 5 people compete. So, we have given ourselves and that is demonstrated in the last year wh ere our win rate has almost been 23% in what we are doing. So, we are thinking upwards of 20% is what we will continue to win going forward at the opportunity. But as I mentioned earlier in some other context, all these are best estimates as we see now. This is something that we will have to keep on watching because we are in business only if investments are being made, and investments will be made only if funds are available and there is a policy prescription which is supportive. Now these two are beyond our control. So, to some extent, we have to depend on what cards get dealt on the table and then pick it up from there and moving forward.

Thank you. The next question is from Jonas Bhutta from Birla Mutual Fund. Please go ahead.

Two questions which are largely, you know, more confirmatory in nature. So, sir, if we see our order inflows for fiscal '24 for the core P &M business, which is about 2.4 trillion, 50% split between domestic and export, sir, you know, which is like 1.2. So, against the 1.2 trillion international orders, you are saying that we will probably clock closer to 90,000 because, you know, the 1,80,000 number that you quoted includes the services bit, sir. The reason I ask this is then we are actually, the ask rate on the domestic side is almost a 40-50% jump in terms of order intake. So, that's a more confirmatory, the first question.

It's about 30% and not 50%. And secondly, you are right, the 1,50,000 that we spoke about does include the services. No doubt about that. And the services business, as you know, is currently going through some sectorial headwinds. So, we don't expect runaway growth in the services for the year. But you know, these are bits and assessments we are making now. We think that if the government were to return , unfortunately, I am getting drawn into some political anticipation. But if the current government gets voted back, I expect continuity in policy. And that would mean that the investments that were held ba ck in the last six months or so will get unleashed. And secondly, depending on the type of majority, if there are points to be proved and established, the momentum will change. I don't know. These are political led situations. But if you look at India, if you look at this being an economy which is expected to become third largest by 2030, it's important we invest in infrastructure. And if India does believe in infrastructure investment, does believe in manufacturing investment, L&T is in pole position. The kind of technology that we have, the skill sets that we have, India would need that because these opportunities are fleeting , right? And if you don't take advantage of these opportunities when they present themselves in a global context, then it will become one year too late. So, my sense is that if there is going to be continuity in policy, forget about which government, continuity in policy, then India needs to now bug up. It set the pace so far in the last 3 -4 years and it has caught the world's attention. I don't expect US -China relationship to improve from here. Whether it is Biden or it is Trump, unfortunately, I think the choice is pretty predictable there, overcomes. I think it's a question of degree of deterioration rather than completely changed style. India has a unique opportunity. I am sure that the people at the helm of affairs are cognizant of this. And if India needs to capture this opportunity, it has to pick pace in infrastructure development and projects development. The projects could be in the energy transition area. It could be in EV. It could be in any other . It could be semi -conductor. It could be in any other import substitute, it could be in Pharma. But all of this would mean that you should have port logistics, yo u have airport logistics, you have road connectivity, rail connectivity. And you should have people working in different corners of the country with power at their homes, water at their homes, etc. So, given the sheer potential, I do believe betting on I ndia post-election does not seem to be a bad strategy. Well, time will tell whether we are successful, not successful, etc. But we do believe that the growth that we are anticipating on the Indian side seems well reasoned at the moment . But as I mentioned , I think every quarter we have an opportunity to exchange views , and then we will see if there is any changed circumstances and whether that's going to have any change in our plans.

Sir, the view is well appreciated over a 2 to 5-year period. That current year will have just 9 months operational from the government side and the ask rate of Rs 150,000 plus crores worth of inflows for us means at a country level even higher. This looks like a tad bit too kind of an aggressive assumption. That was my two cents on that. Sir, the second confirmatory question was again on margins. When we started F '24, we knew our order pipeline, we knew where largely the orders are going to come from . Yet we started with a guidance of 9%. Within that we had also clarified that the claim settlement will not form a very large, but it's not a needle mover. You know, starting F '25 with an 8.25 margin guidance, again what seems to have changed? Because I can't wrap my head around. We already knew the kind of re newable pipeline that we had for bidding, the hydrocarbon pipeline that we knew for bidding and we may have one slightly higher than our expectation , but this 8.25 margin and then sort of even tempering expectations from a slightly longer -term perspective, from an FY’26 perspective is also a bit confounding to me, sir. I know I am beating around the same bush but would really appreciate what has changed.

I will also beat the same bush to see whether clarity is there. See, when we predicted 9% or when we projected 9% , it has got nothing to do with fresh orders to be won because much of the execution was out of the order book. And we knew what is the order book. A couple of things that changed during the year. We nev er expected military escalations to happen. If you recall 12 months ago , we were still talking about possibility of Russia -Ukraine war coming down and ceasefire being announced. We never expected a frozen war in Russia - Ukraine and little did we expect there is going to be West Asia crisis of the type that we are today seeing. Secondly, we never expected possibly the supply chain disruption to continue the way it has done during the year. Earlier it was Covid and later it was dispatch constraints at the va rious ports and airports. And now it is a question of a lot of orders being placed on limited number of people who have finite capacities and their ability to supply within time. The most recent of it being that the Houthis are firing at anything that pass es by. So, we have to take all the way around South Africa and spend more money and more time in getting our supplies done. Now these were things that were not on our radar in April or May of '23 when we forecasted. Secondly, when we forecasted the order inflow of about 10%, we never expected to end with 30%. And we never expected the order book ed which at 28% from international to become a whopping 38% by the end of the year. The changed mix of international orders to domestic orders have also got a role to play in that absolute percentage margin that you are speaking about. Thirdly, neither you nor I did anticipate that we will have capital intensity reduced to the extent to which we have done in the current year. I am sure in your model you wouldn't have predicted a 12% working capital and we did not in our model. And as compared to 18% at the start of the year, 12% is a dream run. So, given so much of uncertainty that has featured our landscape, the margin declined from 9% to 8.25% over the period of 12 months, in a way, it is understandable to me. We have, realizing this progressively, revised our guidance down even though it might look like disappointing on the earlier guidance. We have tried to stay true and current to our assessment at every point in time. Now, given the fact that we are at this stage, what are the green shoots that we are looking at where the margins will expand from 8.25% to 9%? Now, much of the cost that we have incurred in delivering towards our customer's requirement will get settled in due course. So, even though we did not budget large amount of claims in '23, '24, there was a certain amount of claims we had taken. And those claims have also got deferred. So, to that extent, changed mix, deferment of claims settlement, and thirdly, the input cost which was earlier commodity later became fuel, now it is logistics and supply . Labor cost, given the fact that much of the jobs are now getting implemented in Middle East, the labor cost in the Middle East is much higher than in India. Secondly, there are local requirements saying 30% of local workforce have to be engaged. When you have large investments happening and all the global players participating in those investments, the 30% compulsion to source locally means all of us rushing to the same source of either labor contractor or subcontractors for components. Now that automatically skews the demand-supply situation, and we are required to pay the price for staying in the dispatch of the supply. So, given so much of uncertainty, which is what I was saying in the context of another question, 100 basis points moving up and down is something that we need to possibly be prepared for. The compensating factor that we are using because end of the day, what are we committi ng ourselves? We are committing ourselves to value creation. Value creation is a function of both margins and capital employed. Now, we tend to focus exclusively on margins, forgetting the capital employed has improved. And secondly, we also tend to forget that international business is just 25%, is almost becoming 40%. Now, 40% of international business might actually make the margins look softer, but if you look at return on invested capital, it is far better. It is not without reason, over the last few years, we have moved the return on capital investment as well as ROE from the lower levels to where it is today. Today, as we speak, the ROE is close to 15% and it was 9% 3 years ago or 4 years ago. So, the efficiency of the business and the value it creates, I would urge all of you analysts to look at it a little more holistically and not just look at one element of value creation. If you look at it as to whether it is the company creating value for shareholders? Does it do enough to have a buy back? Does it do enough to have stepped up dividend? Does it do enough to have a promising future? I think the company ticks all the box. It is just a question of what we want to focus on.

Thank you. Thank you. Next question is from Girish Achhipalia from Morgan Stanley. Please go ahead.

Sir, I just had one question. On Private Capex, how much of your prospect list is assuming that and if you can answer one of the questions that was not probably clear to me at least. If you have any large domestic orders that you expect to come through in the second half, if you can qualitatively speak on those?

Domestic Capex will be about 25% as we see today, very similar to the way it has played out in FY’24.

And what areas, sir, would then be steel sector or building?

These are quite scattered actually. If you look at last year, we won orders in the steel sector. We won some cement factories. We won some paint factories. We have won some data centers. We have won some commercial real estate. We have won some hospitals. Quite scattered. And I think we would continue to see that play out, because my sense is, India is, apart from few large players, is completely populated by small and medium-sized enterprises. The private Capex soared when the government successfully announced BOT programs in several areas, including roads. So, if you recall 5/ 7/ 8 years ago, everybody wanted to become a power plant sponsor. Everybody wanted to become a road owner. Everybody wanted to become a transmission line owner. Now, the private capital has realized that having government at the other end of the equation is a very uneven equation. And slowly, and including us, we have pulled out of all the concession agreement because we think that private capital does not get the respect that it deserves in terms of return or in terms of terms of play. So, the Private Capex dipped when the BOT collapsed. And the BOT was not just restricted to the Road. It was now becoming an all-encompassing 5, 6, 7 years ago. And over time now it has become low. Secondly, all the power investment has ceased because all the power producers, the private capital who backed it, are all in NCLT in different forms. Because they ultimately will have to sell power and power is a politically sensitive issue. So, given that, that you are going to have a product which is either price controlled or politically sensitive, my sense is that it will take quite some time for new set of private capital providers to forget the past and come and invest. So, the investment in private sector capital will be very opportunistic and situation dependent. Such of those industries where the y are able to see return on their private capital invested will invest and like they have done in the past. So, I don't expect a wholesale surge in Private Capex. If the country wants to get its basic infrastructure in place, basic road network, rail netwo rk in place, basic urban infrastructure in place, world over it has been done on public capital. It can't be any different in India. So, the government has to take responsibility for this and get out of businesses which is suitable for private sector. For example, does government have any business to be in as many defense production areas? I don't think so. So, the question is reprioritization and reallocation of capital. It will happen. I am very confident over time India will emerge with the right equation. And to that extent, I think the private capital surge will happen in a phased manner and not happen in a wholesale manner. Our own guess is over the next few years public sector led capital program will drive the growth. And when I talk about the public sector, it need not be funded out of union government budget or state government budget. But the program should be sufficiently strong and robust for them to attract lenders of global standing.

Thank you very much. That was the last question.

Thank you very much.

I would now like to hand the conference over to Mr. P. Ramakrishnan for closing comments.

Thank you everyone for attending this long call. It was my pleasure to interact with all of you. Good luck and wishing you all the very best. Thank you.

Thank you. On behalf of Larsen & Toubro Limited, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.