Larsen & Toubro Limited analyst Q&A

Thank you very much. We will now begin the question and answer session. Our first question comes from the line of Mohit Kumar from ICICI Securities.

Congratulations on another stellar quarter. My first question is on the Kuwait. At the beginning of the fiscal, we were very, very positive on the Kuwait prospect side. We understand that the few orders have got canceled. The question is, are you still positive for the next fiscal for Kuwait or coming quarters? The second related question is that even if this project comes back, do you think this will come at a much lower scope and size? Subramanian Sarma: Okay. This is Sarma here. First of all, I think as we clarified in our earlier communication, the Kuwait orders were not part of our order book. So I thought let me clarify that first. So, nothing changes in terms of what is there for our Quarter 4 order inflow prospects, pipeline, etc. Having said that, yes, it is a bit of a disappointment that some of those projects where we had participated in the competitive bidding and were L1 have been sort of canceled for a simple reason that the budget they had for each of these projects, we always knew that , when we are bidding th at we are far above the budget. Something has gone wrong in their system, and they were trying to get the additional funds, but I think that was becoming difficult for them. So they have canceled it. But these projects cannot be canceled because these are strategically important projects. These are very important for maintaining their production as well as for meeting their targets. So they will come back. They have already started working on it. There will be some minor tweaks, but this will come back. And I think we are very positive that all of these tenders will be out by this calendar year, and they'll get awarded this year. And since we have demonstrated our competitiveness in the previous bidding, I am positive that we will maintain our competitiveness in the forthcoming bid also. So, nothing really lost, except that we have lost some time.

Understood. My second question is on the Revenue Growth guidance. I think at the beginning of the year, we had given 15% revenue growth guidance. And given that the 9-month our revenue growth is slightly around 12%. Are you still holding on the 15% revenue growth guidance?

So Mohit, I think while I was concluding my presentation, I gave an update on the Revenue guidance itself. Q4 has always been the most busiest quarter for the Projects & Manufacturing business portfolio. So we continue to retain our guidance of 15% for the full year, and we are reasonably confident that Q4, the way we have planned, the e xecution momentum will be at a fast forward pace, both for the Infrastructure -- for all the segments in the Projects & Manufacturing space. That is baked in.

Our next question comes from the line of Sumit Kishore from Axis Capital.

Exceptionally strong performance on Order Inflows and the Working Capital improvement is also quite remarkable. My first question is : With oil hovering around $60, $65, what is your outlook on Middle East, if oil prices remain at these levels? If it persists at this level, do you foresee any prospects getting pushed out? And also the second part of the question is, if you can comment on the execution that we have seen in the quarter, specifically in Hydrocarbons with such a large order backlog, maybe 11% for the quarter appeared a bit low. I know you shouldn't look at quar terly numbers, but still it appeared a bit low. And, how long can the margin pressure in Hydrocarbon specifically , persist? While you have called out that it will be weak in second half of the fiscal, but how long can this persist based on your evaluation of the Hydrocarbon order backlog? Subramanian Sarma: Sarma here again. I think -- yes, I was talking about oil prices globally, whatever is happening, I think it's good that oil prices have held their price range around $60, $65, which is a positive development in my view. And from every conversation I'm hav ing with the Senior Executives of all these National Oil Companies, I think everyone believes that the oil will be priced range bound in that $60 to $65 and as such, the capital allocation for the projects, which are of interest to us will remain unaffected. Because if at all there is a drop in oil prices, it will have an impact on some non-essential projects. But our projects which are important for maintaining production and enhancing the production, they are pretty much be well on track. So, I don't see any impact of the oil prices. I mean, as such, it is stable. And even if there is a slight drop, I don't expect any significant impact on the pipeline of opportunities. That is one part. Second thing is that margins, yes, I think , like we have said, it's a portfolio of projects. Sometimes for some projects it’s a pacing issues while some projects sometimes have some challenges. I expect Hydrocarbon business to come back on full strength maybe 2 or 3 quarters from now.

So Sumit, just to add, I did emphasize that the margin guidance of 8.5% remains the effort for taking into account that we have had a good 9 months despite the fact of Hydrocarbon margins having moved southwards this year. As I stated earlier, as Mr. Sarma also reiterated that we expect some of these, I would say, stressed projects to get closed in the near term and margin should move northward hopefully after some quarters.

Yes, that was very clear. My second question is in relation to the subdued performance in the domestic Infra segment in terms of growth, mainly dragged down by Water, as you have pointed out. So is there any clarity on what is happening in water? How long can this drag sort of continue for the domestic Infra business on growth? The next DFC is not going to get awarded anytime soon. The next high-speed rail is not going to come anytime soon. So what is the outlook for the domestic Infra business?

So I did mention, Sumit, that the order prospects pipeline as we typically talk about is only for the balance period of the year. So as it stands now, the prospects pipeline for Infra, which is for another 3 or 4 months, still is at the same level. And the more important thing, it comprises of domestic prospects of Rs 2.61 trillion . And I reiterate , the important thing in the prospects pipeline, especially for domestic is concerned, is that we are now slowly looking at a higher share of Private Sector prospects. Of course, there are certain large projects of the government, which possibly should get announced maybe after the budget session is all done. But we are fairly certain that, this year has been a good mix of both Public and Private order inflow in the domestic side that has helped us, and that is something we believe should continue into the near term. Coming to the first part of your question . As far as Water is concerned, yes, certain projects which have been funded under the central plans, some of these projects have faced headwin ds in terms of fund allocation. And to that extent, I would say we have also calibrated our execution momentum in this segment to the extent of funds that we receive. Had this fund allocation been normalized, had we witnessed the growth of revenue in the Infra segment would have been more.

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

Again, harping on the water business. So what was the kind of growth in Infra , as we can understand it was 5% for Q3 , because of the impact of water. If we adjust that, what kind of growth was there in the ex of water business in Infra for 9M to 9M? And I can see there is still Water opportunity you have highlighted in the prospects for Infra, roughly about 18%, which is 65,000 to 70,000 more. So , are we looking for more conversion and all these orders, which we are including in the prospects, how the terms are different than what currently we are executing and calibrating?

So, I think you had two questions, Amit. So let me put it , from a statistics perspective that suppose if the water segment was not there as part of the Infrastructure portfolio, then the revenue growth that we have demonstrated at 5% on a growth would have been actually a little more higher to almost 8% to 9% gro wth, because of the projects not getting funded, so the execution momentum has come down and because of that, the growth in revenue has been modest at the overall segment level. As far as the order prospects is concerned, I did talk about Rs 720 billion of order prospects, which is there for the near term. Depending on the type of projects and the underlying funding, we will be bidding according to what we feel should be the right way. But due care is being taken to ensure that we don't get into blocked into working capital because of absence of funding. And also one more point I wish to add. Internally also, we have split the Water business into Domestic and International. And we are now putting a lot more focus on the desalination plants and water transmission projects that are coming up in the Middle East largely. And we do believe that in the near term, some amount of international Water projects also would come up as an ordering opportunity for us.

Sir, on P&M margin, which you guided for 8.5% and you did highlight it that we have already factored in the cost pressure for a few legacy orders. So is it the correct understanding that we can be eyeing for -- once these orders complete, as you said in next 3, 4 quarters, we'll be eyeing for a meaningful margin improvement since these orders would be out and new orders getting executed. So, some color on medium-term margin since we saw some improvement this quarter. But since legacy orders will be out, what is the things lying ahead in terms of margin?

So Amit, I think it has been always our practice that we give guidance for all the major parameters for the year, okay? And Mr. Sarma alluded to the fact that the Hydrocarbon margins being subdued in the current year is because of 2-3 projects, both domestic and international. I also wish to assure you that these projects are at the final stages of completion and hopefully, the margin uptick would be seen sometime maybe after 2 or 3 quarters into the next year. But how much of that will add up to the margin , kindly wait until we close FY '26 and tak e the assessment, because the budgeting for the company will start in the next month or so. We should be in a better position to give you a guidance for FY '27 and beyond sometime in May.

Right, sir. And lastly, sir, on the media article of Chinese player probably getting allowed for the BTG orders. Any assessment you guys have done in terms of the impact it could have, if this is really happening? Subramanian Sarma: No, I think it is a little bit misplaced concern, because, as we understand from the policymakers, the allowance of Chinese players is not for the full equipment. It is only for certain components. In fact, we had also done that advocacy to allow us to import some of the special alloys which are required for the thermal power plant, which was not earlier allowed. So, I think, that is now permitted. So in reality, I think it does not affect us. In fact, it still protects us, and we see a good positive opportunity unfolding in the next subsequent quarters with the thermal power plant, with BTG being manufactured in India.

Our next question comes from the line of Aditya Bhartia from Investec.

Sir, just wanted to understand about the TenneT order. How many packages have you already recorded until now? And how should we think about the opportunity going forward?

Can you repeat that question, Aditya, please?

Sir, about the TenneT order, I think there are 6 packages of that. Just wanted to understand how many packages would we have recorded until now? And is it fair to assume that all 6 packages would be coming to us as a replacement contractor? Or could others be also involved in this? Subramanian Sarma: Sarma here again . We have a framework agreement. And like you said correctly, we have 12 GW, that means 6 packages of 2 GW each. Currently, what we have included in our order inflow and which will then generate revenue is two of those. And then, we are in discussion for the third and fourth with the customers, and we'll have to see when it happens, when they call up, then we will advise you, and we will include that in the order flow. So as and when they get called out, we will include that in our order inflow. But we have a potential for all 6, yes.

Understood, sir. So, does that mean, it is almost kind of confirmed that we'll be getting the third or fourth packages? Or is there some negotiation involved? How does it work? Subramanian Sarma: No, it means that we have been selected for the whole program, right? But then, timing-wise, the customer has to decide when he wants to call up which project. So, we'll have to wait. But I think when they call up, then we'll have a secured position. But until he calls out, as a prudent policy, we are not counting it.

Understood, sir. And my second question is on the margin erosion that we have seen on the Hydrocarbon side. You mentioned that there are certain orders wherein we are seeing cost overruns. Just want to understand roughly when would we have won these orders ? Is it that competitive intensity was very different at that time and it has subsequently improved? So how are you seeing the whole scenario out there? Subramanian Sarma: Yes, yes. I mean, see, most of the projects which are part of the legacy projects in the portfolio have been secured during the COVID time or post -COVID time. And then we had a huge Ukraine war issue and then we had a bunching effect and unfortunately, many things kind of coincided. We are getting through those as one by one, we are handing them over. Like I said before, in 2-3 quarters, we should be out of it.

Understood, sir. And just one last question. We are now getting some orders like metro contract that we announced today. Some of the other orders are also of really large size. So is it fair to assume that execution time lines going forward would be longer than what we have seen historically? Subramanian Sarma: We cannot generalize this because every project will have its own time line. And I mean, they are in the range. I think it depends upon the complexity of the project. Some of them have too much of tunneling and boring and it will be longer time. It also depends on how much the land has been already acquired. So there are various parameters to look at. I don't think it will be appropriate to generalize, but they are all in the typical range.

Just to add to what Sarma ji just now spoke, I did comment that the book -bill Infra order book is 26 months and that includes today's press release of an order that was secured in the previous quarters. The average order book execution period for Hydrocarbons is around 29 months. For the CarbonLite Solutions, it is around 48 months.

Our next question comes from the line of Mohit Pandey from Citi.

My question is on margins. For the international portion of E&C, in light of the commodity price movement, I understand steel is the most important commodity for us, which has not seen as much price movement, but for the other commodities, how should one think on the impact on the fixed price international orders that we have on the backlog? Subramanian Sarma: Generally speaking, like you rightly said, I think our biggest exposure is on steel in terms of commodity, mostly on the international projects. And Steel, fortunately, has been pretty stable. There has not been much volatility, and if at all, there has been a little bit of a downward pressure, not upward pressure. And our risk is generally between the time we submit the bid till award and that is the time period when we are exposed a little bit. Otherwise, once we secure the job, we try to hedge the risk one way or the other, either by placing the order quickly or doing some pre-engineering and placing the orders, or having some Prebid agreements. So, I'm not expecting major exposure to the commodities, except copper and nickel has been a little bit volatile. But then again, we'll have a policy of hedging as quickly as possible. And we also allow some contingency in our estimates. We know how the fluctuation is and unless there is an event like the Ukraine- Russia war, I think we will be able to manage the rest of the volatility.

Understood, sir. And specifically on the Renewables business in the Middle East, given silver tends to be an important part there, how to think about that? Subramanian Sarma: In Renewables business contracts, most of the price risk we have is naturally hedged as we have passed it on to the customer. We had one issue couple of years back and after that we have taken a very prudent approach. We have passed on that risk to the customer. So , in all our renewable projects, we are subjected to very limited risk in terms of commodity prices.

On the execution -- no material price impact?. Subramanian Sarma: Yes, yes. And also I think some of the large contracts we secured from Qatar and all, has also got designated items, which means that some of the price risk is with the customer. Even in international contracts, we are seeing a trend where the customer is willing to accept some amount of price risk, not for all items, but for certain items which are more volatile.

Understood, sir. Secondly, a clarification on the slow-moving part of the backlog. The 3% slow moving order book that was mentioned was primarily Water projects . Is that understanding right?

Yes, it's a combination of largely water projects. Of course, there are certain projects that we secured last year, but the right -of-way, clearances has not been provided. Consequently, they have been classified as slow moving. But I wish to tell you it is not a source of worry at this juncture.

Our next question comes from the line of Puneet Gulati from HSBC.

Congrats on great numbers. My first question is on the Middle East order book. Assuming oil prices remain where they are, do you foresee a potential for higher project offering into this year, Calendar 2026 and Fiscal 2027? Also, how do you think about your market share in Middle East? Do you see more room for it to grow from where you've already reached? Subramanian Sarma: Generally speaking, I think the overall atmosphere is quite positive. There is a strong pipeline of opportunities in various countries within the Middle East, be it Saudi, Qatar, UAE and also in Kuwait - which as I spoke earlier, will come back again. So yes, we are seeing a good momentum there, and we have a good presence. And I think in terms of market share, we ourselves are a bit selective depending upon the type of project and our competitiveness, and the terms of the contract. Overall, we are maintaining a decent share.

Okay. And on the Private sector orders, which have increased, do you foresee higher margins and better working capital control there? Subramanian Sarma: Generally, I think, the P rivate sector projects, in comparison to the P ublic sector are more favorable to Working Capital as payment terms are always a little bit more favorable. There's more flexibility when we are negotiating.

Short-term milestone event.

The next question is from the line of Bharani V. from Avendus Spark.

Of the domestic Infra prospects pipeline that we mentioned of Rs 2.61 trillion, how much will be Private?

Roughly around 35%.

Okay. Related to domestic prospects and overall Infrastructure prospects, which has been flat, we have been strong in the past in segments like Heavy Civil, of course, Water and even Transportation Infra. But right now, of course, Water is slowing down, and we are not very confident on the domestic prospects on Transportation Infra, Heavy Civil, etc. So, what is our likely outlook for these segments for FY '27? Of course, we will continue to do well on Private and on the Middle East, but just your thoughts on FY '27 outlook and order inflow from our traditional stronghold areas, especially in India?

So Bharani, if you track the domestic order inflows in last year, we had a drop. But I think that's the credit of our business model that if in certain segments, for whatever reason there is a pause, there are other segments which we cater to which show a revival. Insofar as Infrastructure segment is concerned, domestic, we have seen sustained traction coming bac k in B&F and Minerals & Metals. Of course, in Water projects, there are prospects that we see, but given the payment terms and the conditions and all, we have been a little more careful in pursuing those opportunities. But the fact is , there are two other segments which are seeing a clear case of revival. And we feel that this revival will potentially offset some of the muted or subdued opportunities in very large Heavy Civil and Transportation Infra projects. But we do believe that the Government, maybe in the 1st February budget announcement , will kickstart the growth momentum back into taking large projects, and that will hopefully compensate for the subdued business conditions insofar as capex is concerned. But Private sector is showing distinct revival in many sectors, which I also highlighted during my earnings presentation.

Okay. So as of now, we have almost 32 megawatts of capacity of Data Center, out of which 14 megawatts is up and running, another 18 megawatts will get commissioned by the end of this fiscal year. The total capex investment in the data center is roughly in the range of Rs 1,000-odd crores. And so far as Semiconductor business is concerned, most of the spend ing that we are doing is still into creating design -led semiconductor chips . We are in touch with multiple customers in this segment. And whatever spend is happening, most of that is getting washed through the P&L itself for Semiconductors. As far as Electrolyzer business is concerned, we have already made a perfect design of a 100% indigenous 4 MW stack. We are now slowly upgrading it to 8 – 10 MW stack. And we do expect a lot of opportunities to come in the near term.

The next question is from the line of Atul Tiwari from JPMorgan.

Congrats on great set of numbers. Sir, just one question on Thermal Power opportunity. Over the past 1 year, obviously, your orders have also benefited a lot from thermal power project. So over next 2-3 years, how many GWs in terms of the total market size do you see in the pipeline from States and the Central PSUs and the Private entities? Subramanian Sarma: It's a bit of a pleasant surprise for us also that how the market is developing in the thermal power plant sector. And it's been good news for us, and we booked quite a bit of orders. And going forward, we believe that overall, I think the country will still add about 15 to 20 GW in the next 2 years or so. We still see 4 - 5 GW opportunities for us, as a minimum in the coming years.

Okay, sir. And sir, what proportion of your total order book today will be at fixed price? And what proportion will have price variation clause of some kind or other?

The fixed price constitution of our order book is in the range of 55% to 45%. 55% is fixed price, 45% is variable.

Our next question is from the line of Priyankar Biswas from JM Financial.

Congratulations to the team. From what I understand is that you have previously highlighted in the past call as well, that there was a significant drag down due to the monsoon, particularly extending even well into the 3Q as well. So had it been, let's say, a relatively normal monsoon and leaving the Water part aside, what is the amount of work that you may have lost in the Domestic space, so in terms of execution?

So Priyankar, in fact, in the month of October itself, I did mention that October also could see some amount of slippages given the fact that the monsoon in some parts of the country where we are having projects got extended, correct? I think I clearly rem ember this. But I wish to tell you, in Q4, I don't think there are any climatic events that are disruptive. So consequently, we do see a normative Q4 for almost all the segments, be it domestic or international.

It's extremely difficult, Priyankar, to talk about 5% growth that we had in Infra segment for Q3, how much that would be. I don't think it is possible to put a number to that.

And sir, if I just squeeze one more in. I understand that two packages for offshore HVDC were booked in this quarter. What would be the rough quantum of that?

It's ultra-mega. Ultra-mega for us is more than Rs 15,000 crores...

Okay. And since you have given the prospects as well for Hydrocarbons, for the three and fourth package, which you are in discussions with the customer, is it there in this year's prospect? Or should we think of it more as next year’s prospect?

Next year. Nothing in Q4. It can happen earlier next year.

Our next question is from the line of Amit Mahawar from UBS.

Sarma sir, I just have two quick questions. First is on the Middle East. We now basically have the best competitive position that we had in the more than 15 -20 years in the Middle East. Do you think next 2 years, cyclically, the competition from Korea and particularly Europe / U.S. can come back? Any color there? And if you can help us understand if in the next 2 years on the P&M, if the share of Middle East is going to be more than 50% over the next 2 years? That's first, sir. Subramanian Sarma: In terms of competition, we have been operating in the same environment for the last few years, with Chinese, Korean and European players present. Sometimes for smaller contracts, we even have the local firms. I think the landscape in terms of competitiveness is not changing much. On the contrary, I would say that we have established ourselves quite well. The customers prefer us to win the jobs and sometimes even the competitors are coming and seeking partnership with us. I don't think anything has changed much. It will remain pretty much the same. If at all, it will be a little bit positive for us in the next 2 years. What was the second question you said?

The share of core top line P&M... Subramanian Sarma: I mean it's very difficult to put a number because it depends on what happens in the Middle East in relation to what happens in the domestic. I mean I think the good news is that I think we are growing well, and we'll continue to grow. I think we are very confident about it.

Very fair. And second quick question is, if the current slowdown in some segments in domestic market, particularly Water, Transportation sustain for the next 1-1.5 years, do you see the risk, not exactly like the COVID risk, of time or cost delays, which are difficult to pass on next year. If it improves, I understand, but if it sustains for the next 1 year, we will have to evaluate it sharper, sir? That's it. Subramanian Sarma: We do not think that Water thing will last that long. I mean this should get resolved. It is a bit unfortunate that there has been some kind of suspension of the work in those areas because of the payment issues. But we are continuously in dialogue with the government. And maybe within a quarter, that should get unlocked and things should start moving. I don't think we should draw any different conclusions from that.

Our next question is from the line of Pulkit Patni from Goldman Sachs.

So my first question is, I understand the impact of a depreciating rupee on your services business. How should we understand the impact of a depreciating rupee on your core EPC business in the light of margins? I mean just some broad guidelines would be helpfu l. That's question number one?

So should I take it now? Or are you going to put another question also?

Okay. My second question is, similarly, while we understand that you hedge commodities, etc. But even in the commodity market, the movement has been quite drastic in the last couple of months. Are we able to hedge all of that? Or we could expect some bit of negative impact of that in the next couple of quarters or so? Those are the two questions.

Okay. So the first part, I will respond. As far as FX risk is concerned, Pulkit, I think you never heard from us that our margins are up or down because of exchange rate variations, because of the very proactive and timely hedge practices that we do to ensure that project risks are covered at least for financial risk part that is on the exchange rate side . As and when the projects are secured and if the international projects or even domestic projects having a lot of forex outflows, we have a mechanism by which we are able to cover the contracts at the rates at which they were estimated by bidding for the project. And that is how it is being done. In fact, even for the ITTS companies, some part of the exchange rate depreciation has flown into their P&L. But they also have a layered hedging process, and that process has been consistently followed to ensure that the margins are not substantially impacted by adverse exchange rate movements. The same applies for the project part of the business as well. Now coming to commodity prices, Mr. Sarma did allude to steel and other places, but I think he will respond. Subramanian Sarma: Yes. like I said, you have to understand that when we are bidding for these jobs, we do quite a substantial amount of pre-bid engineering work. So , we have a reasonable amoun t assessment of the quantities. Like I said, I think our open exposure is only for the bid submission to bid award date, if we are successful. And once we are awarded, then based on the different commodities and their volatility, we go and hedge those commodities based on the estimates we have already done. Now what could be left unhedged portion could be maybe 5%, 10% as part of the engineering development which is not very significant because that gets covered through contingency.

Sure, sir. So, these high commodity prices right now is something that you are not that worried about? Subramanian Sarma: No.

I limit it to one question. Mr. Sarma, you talked about certain projects that you win are more strategic in nature. If I were to be kind of thinking through your entire overseas ordering that has happened, let's say, in the last 1 year, how much of those w ould you classify into areas which are more strategic for your customers? I'm just trying to get a sense of what part is then remaining which is at risk in case, crude moves further down. So just trying to get a sense of your exposure to strategically important large projects won during the last 1 year on the overseas side? Subramanian Sarma: Actually, if you look at it, what we have won, most of the international projects are in the Oil and Gas sector, in the Renewables sector and some of them are now in the critically important Infrastructure, like data centers and things like that. And I would classify all of them as very strategically important. They are not going to be impacted by the oil prices, because Oil and Gas projects, as I said, will continue regardless of where the oil prices are. And Renewable projects and the Data Center projects are deliberate plan of all these countries to gradually invest to prepare themselves for Energy Transition. I think they are also building up their alternative energy portfolio in a very calibrated way. So, all of them are very strategic. We are not in those non-strategic projects like some highway projects, some motorway projects, some beautiful buildings, some aspirational buildings or some tourists places under development. We are not involved in any of those.

That was the last question, ladies and gentlemen. I would now like to hand the conference over to Mr. P. Ramakrishnan for closing comments. Over to you, sir.

Thank you, everyone, for attending this call at a late hour. It was a pleasure to interact with all of you. Good luck and wishing you all the very best. Thank you. Subramanian Sarma: Thank you.

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