Larsen & Toubro Limited analyst Q&A

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

Good evening, sir, and thanks for the opportunity. Congratulations on a very good quarter. My first question is on the order inflow in this quarter. I just want a clarification. Have you booked this Ultra Mega order which you announced today? And also another clarification; have you booked the green hydrogen order inflow in the quarter?

Mohit, can you repeat the second question?

LTEGL is executing one 10,000 ton per annum green hydrogen. Have you booked any order related to the internal green hydrogen project?

Okay. So, the answer to the second question is a “no.” And the answer to the first question is also a repeat “no.”

Okay sir. My second question is on the domestic BTG order which you received in this quarter. Does it pertains to one particular customer or is it from more than one customer?

The order has been received from an independent power producer.

Understood sir. My last question is, are the international prospects moving as expected in Hydrocarbon or there has been some major shift? I am asking this question because the Hydrocarbon prospect has declined from Rs.7.5 trillion to Rs.5.8 trillion on a QoQ basis in hydrocarbon.

Okay. So, the Hydrocarbon prospects pipeline I think more or less has been as per our own understanding. I would also like to point out and it is available in the public domain, there has been significant amount of ordering that has accrued in the Middle East with respect to Hydrocarbon projects. So, as of March, we had given the order prospects pipeline at Rs .7.5 trillion and now as of June, it is at Rs .5.8 trillion. This is what I communicated. So, the drop is Rs .1.7 trillion and out of which we have received almost I would say Rs 8,000 crore.

Understood sir. Thank you. Best of luck.

Thank you. Our next question comes from the line of Sumit Kishore from Axis Capital. Please go ahead.

Thanks for the opportunity. My first question is related to your core business margin guidance. Is there a slight change from the 8.5% guidance that you had given for FY26 , an increase of 20 basis points to 8.3% to 8.5% or there is no change?

There is no change, Sumit. If you recall, on the 8th of May, what we spoke about that we are targeting an improvement of 20 basis points, and I still want to maintain that we will be in that range of 8.3% to 8.5%.

Got it. Sir, can you segregate the impact of the competitively priced jobs in Hydrocarbon on margin for the segment along with the stage of execution of jobs which was attributed as one of the reasons where you had not crossed margin recognition threshold in large jobs as the reason why Hydrocarbon margins had declined in FY25? Also, with your comment that your Q1 margin for Hydrocarbons was on expected lines and is baked into margin guidance for FY26 , so i s that something we should be extrapolating as Q1 margin for Hydrocarbons being the new normal for the fiscal or this is likely to evolve through the fiscal?

Okay, Sumit, when we gave the guidance of the target of 8.5 % for FY26, I did mention in the call that the first two quarters could be the margins in the P&M portfolio would be a little subdued. Now subdued means in this instant case the margins have been stable like of the entire portfolio of 7.6% as compared to ag ain 7.6% in the Q1 of the previous year. Now when we gave this guidance, it is based on the fact that the mapping of the projects in the Hydrocarbon segment, the way it will plan out in the current year has been considered in the overall 8.3%. So, the 7.6% that we have printed for Q1, factors this overall progress of execution of the jobs which were a little competitive price that were awarded in the earlier part maybe two or three years back and which is in the current year into full execution.

Okay. And can you please explain the competitively bid price jobs having impact on margins in Q1 along with stage of execution of jobs?

So, the progress of jobs as I mentioned, the jobs that we secured in ‘21-22, they are going into peak execution in the current year. So, the hydrocarbon margins is reflective of those progress of execution and in a way that is factored in our overall P&M guidance of 8.3%.

Okay. 8.3% to 8.5%?

8.3% to 8.5%. Correct.

Thank you.

Thank you. Our next question comes from the line of Aditya Bhartia from Investec. Please go ahead.

Hi. Good evening, P.R.

Good evening.

My first question is on the merger between Subsea7 and Saipem that we are kind of hearing about. I understand that we used to have the LTA contract also with Subsea7. So, just wanted to understand if it can have any implications for us? How should we see that?

Whatever contracts that we have along with the counterparty that you mentioned will be as per the plan. There will not be any impact.

Understood, sir. And how does it go from here on? Do we also need to renew our LTA contract with Saudi Aramco?

The discussions are happening, and I think in due course of time we will keep you informed on the progress.

Perfect, sir. That is helpful. And my last question is on Nabha P ower. There have been some media articles about the project likely to be sold to Torrent. So, just wanted to understand if there is anything that you would like to add to that?

So, same question we need to ask the media only. So, let me tell you that as part of our overall plan which we have been mentioning that we keep on evaluating all strategic opportunities. But at this juncture, there is nothing we are able to disclose or anything to tell. So, no comments further.

Sure, sir. Thank you so much.

Thank you. Our next question comes from the line of Atul Tiwari from JP Morgan. Please go ahead.

Yes. Sir, thanks a lot and congrats on a very strong quarter yet again. Two questions. So, one is on the Private Sector order book in the domestic orders , I believe the proportion has increased to now 27%. Is all of it being driven by Power BTG orders only or are you seeing some upt ick in activity from any other sector on the private side?

Okay. So, optically, yes, that private sector BTG orders has actually moved the needle. But let me also tell you, we are seeing substantial traction in the construction side of the segment, especially with respect to the Buildings and Factories, where multiple opportunities are coming from the pure commercial real estate, data centers, hospitals being put up by the private sector, and a couple of Minerals and Metals opportunities as well. Only thing is large scale industrial opportunities or investments that are yet to happen, but definitely the mood or the sentiment is far more positive than what it was possibly in June ‘24.

Okay. Good to hear, sir. And the second question is on Others segments margin. There is quite a bit of an increase from 23%-odd to 33%. So, anything specific to call out here?

No, let me tell you that Real Estate margins get clocked in or revenues get clocked in only on flat owned handovers. To that extent, you can have some quarterly variations in this segment because of the reporting constraints in the Real Estate business.

Okay. Thanks a lot.

Our next question comes from the line of Amit Anwani from PL Capital. Please go ahead.

Thanks for the opportunity. First question on the Hyderabad metro . You did talk about 30% fare increase and the average fare has gone up from Rs.38 to Rs.43 almost by 12%-13%. But on the other side, I think if I am right, I think the ridership has gone down to 4,17,000 YoY, and this number has been kind of consistently been there for past seven, eight quarters, barring one or two quarters when we did a higher number. Just wanted to understand how one should think of with respect to breakeven in Hyderabad metro, about ridership as well, and earlier we did talk about the refinancing 2-3 years back. Considering that Rs.1,400 crores of interest cost and Rs.300-400 crores of depreciation, how one should think of the breakeven for Hyderabad Metro?

Okay. So, thanks Amit. Okay, let me give you a broad construct. So, I will cover the Hyderabad Metro ridership, which was averaging at 4.32 L per day in Q1 last year and it was again 4. 31L per day in Q4 of last year. It has dropped to 4.17L per day is primarily because of the fare increase. And we do believe that this is temporary, because at the end of the day, the fare increase of roughly Rs.5 from Rs.38 average to Rs.43 after taking that 10% discount to the 30% increase that we had. I think it is a question of time when the ridership will again start inching back to 4.4, 4.5 levels. Now, the ridership revenue on Q1 of last year at 4.32 L passengers per day with average Rs.38, the revenue metro fare ridership was around Rs.150-odd crores. Now, despite a lower ridership at 4.17 L for the current quarter, but with an additional increase of Rs.5 in the fare, the revenues has actually gone up by another Rs.13 crores to touch Rs.163 crores. The EBITDA for Hyderabad metro was Rs.101 crores Q1 previous year , now, it is at Rs.112 crores in Q1 of the current year. The average depreciation amortization ranges between Rs.75 to Rs.76 crores per quarter. And at the current level of roughly 12,500-odd crores of debt, the Hyderabad metro interest averages around Rs.240 crores to Rs.250 crores. And that is how the overall construct when I gave you the numbers that the loss has been consolidated in L&T books at Rs.208 crores in Q1 of current year as compared to Rs.214 crores of Q1 of the previous year. Now coming back to overall PBT breakeven I guess this has been also communicated last time that the ridership should be going around 700,000 ridership per day and the debt levels which is today around Rs.12,000-odd crores has to be brought down to Rs.8,000 crores. And the plan to reduce the debt levels from Rs.12,000 crores to Rs.8,000 crores is a combination of two things. We are yet to get around Rs.2,100 crores of the State Government interest-free loan assistance and also TOD monetization we expect it to happen over the near term, which will give us another Rs.1,500 crores to Rs.2,000 crores. Now, if you have to do with the current levels of debt at Rs.12,000 crores, the breakeven ridership, I think is too high, that is almost at 12 lakh passengers per day.

Understood, sir. Second question is on the Middle East prospect. For the remaining nine months, if you can highlight now what kind of projects which are there in the pipeline, whether it is more of Hydrocarbon, Renewable or LNG terminal or there is some color with respect to the proportion of orders in the Middle East market ? And second is that over the past two years, the international dominance with respect to order inflow and domestic has been relatively kind of not growing with respect to prospect. Some color, are we seeing any large scale buildup of domestic order prospect , not this year, maybe with medium-to-longer term perspective, since election and all the major events are over. So some color on when are we expecting that the domestic pipeline will also show strong strength?

Okay. So, let me take the second question first. I think the domestic prospects pipeline has been quite robust. But when it is compared to the movement of L&T’s international prospects pipeline, I think that is the way it seems to be relatively coming off. But we do see a strong set of public spends happening and I just responded to a previous question. The private sector in some of the segments is actually driv ing a lot of capex spends and we expect the momentum to continue. Coming to the international prospects pipeline, as I mentioned of the Infra segment, the total prospects pipeline of Rs 7.96 trillion, the international prospects aggregate to almost Rs 2.93 trillion, largely led by Renewables, Power Transmission & Distribution, and some amounts of almost Rs 0.2 to 0.3 trillion across the other Infrastructure segments. So, that is the way I will put it across. Coming to Hydrocarbon, total order prospects for the nine months, I did communicate at Rs 5.78 trillion, out of which I would say 5.51 trillion itself is international. Here again, it is, I would say, 70 to 80% coming from the Middle East, comprising of a major portion coming from offshore and onshore. Besides this, this Rs 5.51 trillion of international prospects also includes offshore wind at 1.31 trillion, which is not necessarily Middle East.

Understood. Thank you, sir. Thanks for taking my question.

Thank you. Our next question comes from the line of Vinod Chari from Phil lipCapital. Please go ahead.

Yes, hi. Thanks for the opportunity, PR. Your order book has now crossed Rs.6 lakh crores. I just wanted to understand, is there a peak order book that you look at internally, beyond which execution begins to get cumbersome, any specific number that you have in mind on the order book?

A good question, but it is a good challenge to deal with, Vinod. Okay. So, let me put it like this. I think it is not proper of me to communicate or say that the threshold is Rs.7 lakh crores or Rs.8 lakh crores for L&T. It does not work that way because we have to see the capacity available across the multiple segments that we have. So, it is constrained by those areas. And obviously, as we keep looking at the prospects pipeline and if we find that the prospects pipeline of a particular sub-segment continues to be quite strong, L&T has always been building up capacities in advance to address these prospects.

Sure. Thanks, PR. The second question I had was on your E2E acquisition. So, you plan to treat it as a standalone asset or will it be like a building block for our Infrastructure solutions? Because a lot of global engineering companies are moving towards such kind of offerings. So, what is our take on this?

So, the E2E acquisition has been done primarily to complement our start into the data center business. Okay? So, it should not be considered as if L&T is doing a standalone acquisition. And it is a complement because instead of trying to organic build up the practices for ensuring better data center offerings, we have decided to partner with E2E. So, we will leverage their competencies while we address a more tech-focused data center solutions to Indian clients , and we thought that it would be better to do that, and to ensure that it is complementary and it is working as a collaboration. Both the companies decided that we will take up a strategic investment. And as we speak now, we hold 19% in the equity stake of that Company.

Sure. So, we have now started seeing some amount of retrenchment happening in IT services. And our long-term complaint has always been lack of engineers because most engineers want to go into IT. So, now do you see manpower supply structurally improving for capital goods companies or industrial companies, particularly for manufacturing?

Okay. I think what I would say is, of course, we have challenges in terms of building up appropriate technical skills within the Company to address the growth momentum that we are seeing both India and abroad. That has been there. With some amount of headwinds, if you hear about the recent news articles, if that is the way to conclude, I think it is premature. Let me tell you both within the entire group, because as a group, we are also looking at engineers which deliver solutions in our basic Projects and Manufacturing portfolio and also addressing the requirements of IT and technology services companies. I think L&T is spending a lot of, I would say, significant amount of investments to ensure that all our engineering talent are in a position to either get built in the IT services domain or get deployed in the varied projects that we are executing in the projects part of the segment.

Sure. Thanks, PR. Thanks for the response. I will come back in the queue.

Thank you. Our next question comes from the line of Pulkit Pat ni from Goldman Sachs. Please go ahead.

Sir, thank you for taking my question. I have just one book -keeping question. When I look at your presentation, the corporate EBITDA is a very large number this time at Rs.520 crores. Historically, this number has been in the Rs.125 to 150, 160 crores range. Anything exceptional that has included there?

It is largely treasury income arising out of better yields. That is what I am talking about, better efficient funds management, both at the parent and LTIMindtree, because these two companies have substantial amount of temporary cash surplus, and it is because of a higher quantum of temporary surplus deployed and better yields, I think the other income has moved up by almost Rs.400 crores in the standalone Rs.200-odd crores and Rs.200 crores across the other entities.

Sure, sir. Because it is 25% of our core PAT, so I was wondering. Great. Thank you. That is it from my side, PR. Thank you.

Thank you. Our next question comes from the line of Shirom Kapur from Jefferies. Please go ahead.

Hi, thanks for the opportunity. Just a bookkeeping question. Could you break up your overall domestic versus international prospect pipeline for the balance nine months?

I think this one I covered. Okay, let me put it like this. I gave a total order prospects of Rs 14.81 trillion at the P&M level. The domestic prospects pipeline aggregate to Rs 6.13 trillion and international Rs 8.68 trillion. Okay? Did I answer your question?

Yes, yes, I just wanted the overall breakup. But if you have any further breakdown of that -?

I think I gave it to you, Sh irom, while I covered each segment. I gave the order prospects where I gave a breakup of domestic and international. So, this was just to address the total order prospects of Rs 14.8 trillion, which I said at the start of the call, broken up into Rs 6.13 trillion for domestic and international Rs 8.68 trillion. Since I addressed international 8.68 trillion a little time back, I will give you the segment wise breakup of domestic ; i nfra contributes to Rs 5.03 trillion domestic. Hydrocarbon is Rs 0.26 trillion domestic, CarbonLite is Rs 0.55 trillion domestic, and both the Hi- Tech Manufacturing sub-segments of HED and Precision Engineering, Rs 0.24 trillion, and Green and Clean Energy around 0.04 trillion, that adds up to Rs 6.13 trillion.

Noted. Thank you so much for that breakup. And just another question. I know you addressed that you are seeing certain on the private side your capex picking up in certain segments. But is that going to be primarily a driver of domestic order flow going forward? Just basically want to understand the on-ground reality of the overall macro environment in India and how Capex is shaping up there?

Okay. In the near term, if you take a domestic order inflow as X, I think even for the current year, we can expect the share of government, State, Centre, plus Public Sector Corporations to be in the range of 75% and Private to be 25%. Sometimes there can be variations because one important thing which has come up in the private sector is the private sector coming to invest into the coal -based power plant opportunities. So, any further order wins could potentially tilt the ratios maybe for that quarter, for that period. But structurally, India is still, as we see it, we will continue to be led by government ordering, which is almost 75%-odd.

Great. Thank you so much.

Thank you. Our next question comes from the line of Aditya Mongia from Ko tak Securities. Please go ahead.

Good evening, everyone, and thanks again for the opportunity. PR, the question that I had was more on your unchanged guidance for working capital. Now, we have seen 12% become 11% in the last two years, and the guidance for 12% again, does not tally well with the cash flows that you were trying to kind of highlight in the first quarter wherein there is a net positive number versus an outflow last year. Just trying to get a sense of why has the guidance as of now been maintained at 12% versus 11% YoY when such large moves are happening on collections?

Okay, so, Aditya, the collections, in fact, for the last, I would say, almost two years across eight to 10 quarters, I think the Company has been doing really well, partly because of timely execution, timely billing and customers also making payments of time , and also, part of the orders getting executed through international orders where the payment terms are a little more better as compared to domestic orders. Having said this, we gave the guidance in the month of May 12% for the full year. We are just in the month of July . We just completed the first quarter. First quarter has been good. So, at this juncture, we would like to maintain the guidance of 12%. Hopefully, by the close of the year, maybe when we close out the results for October or possibly as late as even Q3, we will see at that point of time whether we need to upgrade this guidance to a better level.

Understood. The second question that I had was, I am just trying to kind of gauge the hit rates in domestic and international in 1Q. It seems that the hit rates international appear to be a bit on the lower side, low double digits, where as the hit rates in domestic are larger. I am just trying to get a sense whether there is more keen competition that is now being visible on the international side of things and how to think through the hit rates incrementally that remains on the international side?

So, Aditya, you cannot ask hit rate basis one particular, I would say quarter, okay? Because it is possible that if you get one large contract in one particular quarter, we will improve the hit rate relatively speaking. So, I think it is more a statistical data point for a quarter. Structurally, I think we can talk about, when we talk about order prospects at the start of the year, the hit rate in a reasonably modest year ranges between 20 % to 25%. On a very good year, it can be 25%. But average, if you see L&T’s numbers of the last five years, the order inflows that we have reported for the end of the year as compared to the order prospect at the start of the year, the hit rate has been ranging between 18% to 25%.

Understood. The last question that I had was on this division into onshore and offshore in the Energy portfolio. Now, you gave some co lor on offshore wind, but if you have to kind of classify onshore and offshore as portfolios within the Energy segment, how would you compare them in terms of comparative intensity and risks and, let’s say, so-called hit rates, given L&T’s capabilities?

So, first and foremost, the reason to create two separate verticals inside the Company under Hydrocarbons was primarily to give increased focus because both the type of jobs has been rewarding as well in terms of good amount of order inflows and also the prospects of continuing spends in those segments by the oil majors, largely in the Middle East. That was one of the reasons we created that and so that it also builds up a better connect with the client ecosystem because the client ecosystem also has a separate project management team for both onshore and offshore. So, it is just to ensure that we try to better connected and build up focused expertise. I think that is the way we are looking at. And because of the size of the opportunities in both the segments continue to be robust. That was the reason that we have done this. I did not get the second part of your question.

Just trying to get a sense that since offshore is a new area of work, and we know less of the competitive intensity, should we be assuming similar hit rates or how to think through that , and the risks associated with the same, yes, in terms of business risks?

So, Aditya, let me clarify. Offshore is not a new area for Larsen & Toubro. We have been doing a lot of platforms in the offshore, especially with many of the Indian corporates, you know whom I am referring to. It is not a new, I would say, expertise that we have built up. It is the only thing that a large part of these opportunities are now coming from the Middle East in this area. And also I would like to tell that there are fewer companies which are common as competition in both the segm ents. So, if you really ask me what we see common in both the segments will be five or six companies from a number perspective, which cater to both onshore, offshore.

Understood. That answers my question very well. Thank you, PR, for your response. Those are my questions.

Thank you. Our next question comes from the line of Parikshit Kandpal from HDFC Securities. Please go ahead.

Hi, P.R. Congratulations on a great quarter. So, my first question is on the order backlog of Rs 6.13 trillion now. So, while the inflows have been strong, order backlog growth is strong, but still the revenues are not catching up. So, if you can give us some color on the last two years order inflow how the book-to-bill is behaving, is it shortening, elongating, and whether it will catch up in growth in coming quarters?

So, apart from one or two segments, I would say that the execution momentum in most of the segments have been in line with the stipulated terms and conditions under the contract. So, we have not seen any slowdown. Like I did convey this in the May call tha t some amount of slowdown was witnessed in the water and effluent treatment part of the business primarily because of some fund allocations drop or I would say scarcity of fund availability under the Jal Jeevan Mission projects. I think barring for one or two segments in the overall P&M portfolio, the rest of the execution is happening at its planned trajectory.

But is there any elongation in book-to-bill for the new orders, much lower than the order inflow and order book growth?

I think I would say that it is roughly ranging between 29 months to 3 years. I think that is the average book-and-bill. Barring for the segment that I referred to, we have not seen any sort of headwinds that prevent the execution. They are as per planned schedule.

Second question was on NWC. Last quarter, you alluded that because of JJM, if the payments would have come on time, the NWC should have been better. Do you think this quarter is reflective of the collection or do you think that still if the outstanding would have been recovered up to your expectation, the NWC would have been much better versus what you have reported?

Okay. Let me tell you, of course, the Jal Jeevan projects, some amount of funding has resumed. But I do not think it has come down to complete normalcy. We do see some amount of fund-related constraints in some of the states where the Jal Jeevan Mission projects are getting executed. So, if you really ask me, the overall net working capital of the P&M segment today is at almost 8.5%. Now, if I just exclude water as a segment, there can be a further improvement of almost 75 basis points.

Okay. So, you have still some headroom cushion as the receivables come in on time. Okay. Last question is on the Real Estate side. So, what has been the order booking of the pieces this quarter? And as a year as a whole, how are you looking at this? What kind of capital allocation you are looking at? Because this segment seems to be promising, but it gets hidden in your SOTP or your overall business. How are you thinking about this more on mid-to-longer term?

Okay. So, for the Realty business, the order inflow for the quarter was around Rs.1,000 crores and the revenues was around Rs.500 crores. In terms of the overall perspectives, in terms of residential units that we have launched is around 13,000 units, out of which handed over is 6,200 units. Sold but yet to be handed over is around 5,000 units. And we have unsold inventory of around 1,700.

And more on the longer term, how do you think this order book of 1000, I mean, we have heard in the press that this number can significantly multiply over the years, but internally, how do you think on an annual basis that the Rs.5,000 to 6,000 crores of pre -sales, if they are going up to Rs.10,000, 12,000 crores in the next two years, how do you think about this segment?

Okay. So, as far as the Real Estate business is concerned, we are focusing on a lot of real estate developments, primarily in Mumbai, Navi Mumbai, Chennai, Bangalore, and NCR region. Today, many of the launches have been through own land monetization and also some part of joint development agreements. We are also looking to expand this portfolio meaningfully by getting into some amount of land acquisitions. But at this juncture, it is premature for me to give a number to it, because this whole thing about real estate business will be covered in detail, we frame out of start plan exercise for FY26 to FY27 to ‘31.

Okay. Yes. And just one thing on labor issues, there has been noise around the shortage of labor , some of the other peers have been talking about it. So, any challenge there, whether it had any impact in this quarter? So, year as a whole, I mean, whether it could have any impact? So, how are you bracing yourself to make good this opportunity for growth?

Yes, the labor availability, let me tell you the issue is not exactly of labor availability, the issue is of the churn within a year. So, which means practically speaking, if we are talking about in Indian projects, we have almost 400,000 of labor working across the multiple sites. What we are seeing as a phenomenon is every three months, the entire churn portfolio happens. To some extent, retraining costs and bringing a new set of people has an impact. But we are also finding our ways and means of having more of pre-engineered structures and take it directly to the site. But I guess it is a structural issue for the country, and we are trying our level best to overcome it by doing most of the work instead of in -situ location, doing it in the factory level and take it directly to the site. Better construction methods are bei ng deployed. And hopefully, I think we should be in a position to improve the execution ramp up further in the future.

Sure. Thank you. Those are my questions. Wish you the best.

Thank you.

Thank you. As there are no further questions from the participants, I now hand the conference over to Mr. P. Ramakrishnan for closing comments.

So, thank you, everyone for attending this call. It was our pleasure to interact with all of you. Good luck and wishing you all the very best. Thank you.

Thank you so much, sir. On behalf of Larsen & Toubro, that concludes this conference. Thank you for joining us. You may now disconnect your lines.