Larsen & Toubro Limited analyst Q&A

Thank you very much. We will now begin the question-and-answer session. The first question comes from Mohit Kumar from ICICI Securities. Please go ahead.

Congratulations on a very good order inflow in H1 FY25 despite a very high base. My question is on the first, how do you think about domestic prospects? Last year was subdued on account of general elections. The first half order inflows are also flat. The question is, are you seeing the signs of improving activity, I mean, in substantial terms in H2?

Okay, Mohit , I think when we reported the financial results for FY24, when we gave the guidance for order inflow growth of 10% at the group level, we had actua lly baked in that the first six months as far as the domestic order prospects converted to order inflow could be a little subdued, given the fact that the first quarter was elections, followed by the government formation in Q2. Despite the subdued environment, we believe that our numbers of domestic order inflows have been quite good and in line with our own expectations for the first six months. But definitely the H2, we believe that given that the conditions for the GDP growth and the overall financial state of affairs for the government and the private sector, I guess we could see a more busier second half with respect to the overall domestic ordering environment is concerned. As I was talking about against the total order prospects of 8.08 trillion, the share of domestic prospects is 57% aggregating to 4.6 trillion. So, in a way, it actually suggests that as we had assumed at the start of the year, the second half of the current financial year would tilt more to domestic ordering resumption at a larger scale.

Understood, sir. My second question is on the EPC tender for the thermal power plant. Is it fair to assume that you'll not participate in the full EPC tender for thermal power plant? Having said that, EPC has a forte, right, and why are we restricting ourselves to only doing BTG? In fact, even in the NTPC bulk tender, it's a main plant package, meaning that we have to do the EPC works for the main plant. Can you help us understand? Subramanian Sarma: Okay, this is Sarma here. So, we had said earlier that in the overall thermal power plant scenario, EPC which includes BTG and balance of plant, we had seen: a) first thing was that the terms and conditions were not favorable, and 2) what we had seen is th at there were significant delays in the balance of the plant -related activities particularly multiple interfaces with various stakeholders. So, combination of that was really causing some hardship in terms of extended project duration and hold up in bank guarantees and unfavorable cash flows etc. We had decided to withdraw from the whole segment, but then later on, there had been some extensive discussions and we have been able to negotiate better terms and conditions for the BTG part. And I think it also fits well into our core capability of Manufacturing, where we have a very advanced capacity and de-risk the overall portfolio because then we are kind of more in control of our own destiny and less dependent on others. I think all that fits into our overall risk profile. And we believe that with this approach, we should be able to deliver more consistent and better results.

So, that's very helpful. So, my last question is that how are you thinking about monetization of the balance 14 million square feet of land at Hyderabad in medium term? And what is holding us back from the accelerated monetization?

So, Mohit, I will take that. This is PR here. So, as we have been talking about in terms of bringing back the Hyderabad Metro on track and i ts a combination of two items : one is the State Government financial support and along with the TOD monetization. Since it is a concession project, each of the TOD monetization that we need to do are subject to prior approvals of the government. So, we did one particular tranche in the Q2 of the previous year, and we are looking to monetize some of the parcels in the near term. Hopefully, I think you should get something happening in the next six months or so. But it will all be done in tranches, and each tranche will be subject to a prior government approach because it is the overall, the Metro construction is a combination of running the Metro along with the real estate development. So, whenever we get an opportunity, interested party to buy over a particular land parcel, we will take a government approval and do that. And basis the pipeline of discussions and opportunities are happening now, we do expect some amount of monetization to hopefully gain momentum and get cryst allized by the end of this financial year.

Thank you. The next question comes from Atul Tiwari from JP Morgan. Please go ahead.

Sir, one question again on Hyderabad Metro. So, the PAT loss was 2.07 billion in this quarter. It looks like that it has trended down versus close to being 2. 7, 2.8 billion per quarter kind of number. So, is there any one -off or it is like a normal decline because of increasing the cash flows?

So, Atul, Q2 of the current financial year is normal operations of Hyderabad Metro and of course the ridership has improved , but I would like to state that the loss in Hyderabad Metro today is on account of the interest on the loans that we have taken. It is because of a slightly lower interest rate and a lower loan portfolio, the losses are coming down. Now, this is steady state operations quarter as far as Hyderabad Metro is concerned. So, as the passenger traffic improves, slowly the extent of the loss should be coming down.

Okay, sir. And sir, now that the execution of the large hydrocarbon projects won last year has started, so is it tracking in line with whatever we expected in terms of margin performance and the speed of execution, etc. Asking because there has been a bit of a concern on very large exposure in Middle East and in the margins in those projects. Subramanian Sarma: Yeah, this is Sarma here again. Both those projects, of Rs. 40,000 crores, I think they are very much on track. In fact, as you speak, we are slightly ahead of schedule at this point in time. And we have made some significant commitments already with respect to cost commitments, in terms of supply and construction. So, far it looks good.

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

So, my question is on the Hydrocarbon prospect. You highlighted that there's been Rs 80,000- Rs 90,000 reduction in Hydrocarbon order prospects for H2. Just wanted to broadly understand, has the pace of ordering slowed down or is there anything which we are not considering now as a prospect order for H2? Is that the reason for the reduction in hydrocarbon prospects? Subramanian Sarma: No, see the reduction what PR was talking about is with respect to last quarter same time and as he had explained that we had a large contract, two of them, Rs. 40,000 crores were awarded to us and but as such in this financial year and first half , we have secured awards . We are performing as per our budget, and it is as per our forecast. So, I said I do not see any slowdown or any loss of momentum. It is only in comparison to the lumpy big jobs we had last year and that is the nature of the business, I mean never know that maybe we will get similar lumpy large jobs in the second h alf. So, we have a still strong pipeline , and we are bidding for some large projects and we will have to wait and see how it unfolds in the second half.

My second question, sir, on the order prospect overall. So, we have seen that the prospect has been quite lumpy last year from international markets and this year also there's been substantial orders from international markets. Now we have been doing thermal also, BTG, as you highlighted. So, broadly for the domestic market, next 18 months, which areas or projects where we are seeing momentum? And are we overall seeing the domestic order intake also picking up strongly in next 12, 18 months since now the major events are over with respect to elections and many things are behind us. I just wanted to understand the 18-24 months perspective and major order prospects in domestic markets.

Okay, so let me take that . Apart from what we spoke abou t just a while ago on the CarbonLite solutions that the order prospects with the BTG, I think a large part of the prospect pipeline centers on Infrastructure. So, if you really see the total Infrastructure order prospects for H2 aggregated to 5.42 trillion, out of which the share of domestic was 4.13 trillion. Now, if I look at the overall composition of this 4.13 trillion of domestic order prospects, I would say from our perspective, it is actually a good mix of industrial str uctures, factories, residential structures, data centers, hospitals in so far as the B&F segment is concerned. We do see a significant amount of investments happening on the transportation infra, both in rail and also on the road, expressways & elevated corridors. This also is quite substantial. And this also we believe that we should be getting a decent share provided the prospects get converted into the tendering mode. Besides these segments, there are also certain opportunities coming up in ports, in the airports and also hydel related projects in the country. So, in the Infrastructure segment, the composition of order prospects covers most of the segments where L&T is one of the leading players.

Lastly, on margins, you said that Project & Manufacturing margins would stay similar to last year. So, now, since we have moved 4-5 months, and you have some clarity on the prospects . Basis the current order book, are we now sensing improvement in FY26 and any quantum you would like to broadly highlight on margin front when the margin improvement can be expected to start?

I would like to mention here that as far as margins, all the guidance is concerned, it is for the specific financial year. So, as we have closed H1 at a higher margin clip as compared to H1 of the previous year, the P&M portfolio margin has im proved by 20 basis points. So, the year has been good. And at this juncture, I would like to maintain that the margin guidance that we have given at the start of the financial year with respect to the P&M portfolio at 8.2 % to 8.25% still holds good. Let us see how Q3 shapes up before we look at revising. As far as next year is concerned, I guess we will look at next year at a separate timeframe, not at this juncture please. However, having said this, let me also tell you the order book that we have is a mix of both domestic and international with a good mix of projects across sectors, some high-quality jobs, and also some normal commercial-related jobs. So as we end FY25, I think FY26 looks to be a good start from an overall margin trajectory perspective. But to put a number to that, I think it's a little premature.

Thank you. The next question comes from Parikshit Kandpal from HDFC Securities. Please go ahead.

Sir, earlier in your commentary during the call, you mentioned getting into development assets in the green power. So, if you can elaborate, what are you looking at in this segment? Subramanian Sarma: Okay, in the green energy , we have two markets. One is the export market, and one is the domestic market. Within the domestic market, a lot of tenders have come out for green hydrogen as well as green ammonia, refinery sector as well as fertilizer sector. And we will participate on those. And they are all mostly on the development side. And similarly on the international also, we are seeing some development and traction in supply of green ammonia and green hydrogen in Korea and Japan and those countries . We are partnering with some of those international players and will participate in those tenders. And if we are successful, then we will maybe have an off-take agreement against which then we will consider investing and developing those assets. As far as IOCL tender is concerned, that is again for green hydrogen in Panipat that is available now as part of this large tendering activity going on and we will participate as we had done it in the past.

Okay, to add to what Mr . Sarma just now spoke about as far as our presence in Development Projects in this space is concerned, I think we will be very clear that we will always work on with those projects where the offtake arrangements are co nfirmed and for a longer time so that there is a visibility of return.

But will you also be open to looking at solar development assets? Subramanian Sarma: No, currently that's not part of our plan.

Battery storage? Subramanian Sarma: Battery storage is something we are studying now , we are exploring and looking at some technologies and it is under evaluation. I t’s a bit premature to say anything definitive, but it is under consideration. But solar, we have made a decision not to get into development. I think it's too late in the game in my view.

And neither into module and battery, I mean, still Manufacturing on the sola r side. Even that you will not. Subramanian Sarma: No, that is not in the plan.

Second question is on the increasing share of export orders or international orders. So, PR, how do we look at the margins? You said that this year margins will maintain, but incrementally in absence of any large orderi ng on the domestic side till now and the share of international increasing, in the last call you highlighted, that a trend will be like from here on the margins will keep improving. So, will the trend change?

So, Parikshit, the international project margins have been maintained in line with the bid conditions that we had secured those projects. But as you may be aware, most of the international projects are largely fixed -price jobs. So, a timely c ompletion will eventually lead to a better margin realization. Having said this, I think one important thing is, it is not only giving us size, it is also giving us recognition across the globe, because today the Middle East is just not the only geography where we are getting projects both in hydrocarbons and renewables. We are getting basis our strong performance in the projects that we secured. I think it's giving us good credentials to pursue opportunities outside of the Middle East also. But having said this, in fixed price contracts , timely execution will obviously ensure better margins in the future . As Mr. Sarma pointed out, some of the major hydrocarbon jobs that we secured in the last 12 months or so, the execution has been in line with expectation and some cases we are actually ahead. Hopefully, I think it should lead to an improvement in the margins profile, but to put a number at this juncture, maybe again premature, but I wish to conclude here that the mix or the 50 -50 composition of, I would say, execution between domestic and international, also giving in the form of better cash flows and thereby overall improvement in returns is possible.

The return w ise is fine, but mix wise, it's diluted as the margins and then export mix or international mix will be margin diluted?

It depends on the stage of execution. So, hydrocarbons, what we are witnessing is all early execution stage projects. So, hopefully in the next year, they will achieve peak execution when in the form of, we don't recognize margins unless the projects achieve a particular stage. So, once they achieve, once they cross that and if there is on -time execution, you should see so me amount of margins improvement to happen.

So, in the NWC data, we have seen a very, very strong kick-off and improvement there. So, what is driving this? We have been hearing from other much smaller EPC player, they are facing problems in the Jal Jeevan Mission project. The collections have not been up to the mark. So, because of that, they have reduced their execution. But overall basis, what is driving these strong collections for you and have you also faced some issues in the Jal Jeevan Mission projects, which is part of the order book?

So, Parikshit, let me tell you that when we are giving the working capital, I wish to reiterate that this gain or the favorable movement in Net Working Capital is a combination of a major drop that we are witnessing in Gross Working Capital further supported by advances which are shown in current liabilities, advances from new projects. Yes, in certain sectors across certain sectors or segments there are some headwinds in terms of delayed collections because of the financial conditions of the respective customer or state. But we are mindful of the fact that we have a very large order book to execute, we are executing in such places only where the execution progress is in line with the collections that we are getting. So, we are able to manage this in a better way given the fact that we have a multi -segment, multi-geography that is within the India itself . Multi-geography means I'm referring to a combination of both state, central and across s tates. I think it's possibly enabling to ensure that we don’t do execution unless and until payments are happening on time.

Just last question for on the real estate business. I mean, now it has become quite sizable. I mean, you spoke about Rs. 8,000 crores of order booking and Rs. 4,000 crores of revenue. And the media reports suggest that you're looking at Rs. 40,000 crores of order booking over the next 10 years in this business and adding about 50 to 60 million square feet of land parcels. So, I wanted to know what kind of margins you typically make in these, because this is now going to become very sizable. Slowly and steadily, it's becoming quite sizable as a part of the business. So, what kind of margins typically you are able to record in this segment or embedded margins or if you can give some color on embedded margins on the sales or order bookings?

Like for example, okay, let me put it like this Parikshit that in the current quarter , which is the Others segment, the real estate business i.e. the Realty business had secured a margin of almost 37%. Now, is this embedded margin because in this business? We recognize revenue only when the residential unit is handed over. So, in quarters, wherever there is a large amount of handing over after receipt of the clearances of the respective municipal jurisdiction, you will find a bump up in revenue an d also bump up in margins. But just to conclude our immediate plan on this particular business is the total or a total portfolio of almost 84 million square feet comprising both residential and commercial, we have almost completed 24 million square feet, which means that is already gone into the P&L of the past. So, that leaves maybe around 40 million of residential square feet yet to be monetized or coming as revenue and profits in the near future, and a commercial around 20 million square feet. So, broadly speaking, 84, you have already done 24, that leaves 60. And in 60, you have residential comprising of 40 and commercial comprising of 20. Commercial would be a combination of lease and outright sale, whereas residential as the model is, it's an outright sale. Now out of this 40 million square feet of residential, under construction that is launched, and we are taking bookings, would be around 10 million square feet. And future development, I was talking about various places in a combination of joint development and also our own land parcels is another 30 million squ are feet. On commercial, under construction is 10 million and future development is 10. Now, basis this, this is the existing, I would say structure we have. As we finalize the real estate business, how we are going to take it up ahead, we will cover that at an appropriate point of time.

Typically, what kind of Capex you do here on the land annually?

The new parcels that we are developing currently apart from monetizing our own land parcels is largely on joint development route. We are not investing land for residential development at this juncture.

Thank you. The next question comes from Aditya Bhartia from Investec. Please go ahead.

So, if we look at our order inflow guidance, we are looking at almost 20% order inflow growth in H2 while our prospect pipeline is down by almost 10%. So, what is really leading to it? Are we anticipating a higher market share or are we anticipating a higher chunk of those tend ers actually getting converted into orders? Finalization is happening quicker.

So, Aditya, I think since you have asked a question, I need to go with numbers. Last year, FY24, the actual order inflow that the company printed was Rs 3 lakh crores consolidated. And if you take a 10% guidance on growth, the FY25 guidance for total order inflow is Rs 3,30,000 crores. Now, the H1 FY25 actuals is almost at Rs 1,50,000 crores. Now, if I have to go back to meet the guidance of Rs 3,30,000 and I subtract the IT companies and Financial Services , my core business of Projects and Manufacturing, my run rate, which I need for order inflow is another Rs 1,50,000 crore. Okay, now my order prospects is Rs 8 trillion or Rs 8,00,000 crores. Okay, now you know, you can derive the win rate that is required, provided all these order prospects come into tendering, I mean, the subject to the normal qualifiers, but this particular win rate that you will get, is not something very unusually different from what we have printed , or we have done in the recent last 2 to 3 years.

Obviously, the one big thing is that many of the order prospect that we have are very large ticket sizes in all the segments, both domestic and international. Obviously, we believe that some of these will get bid out and we stand a good chance of trying to make it. So, let me tell you that it is not something at this juncture a number where very high run rate that is required. This is something that we have witnessed in the last 2 years.

And sir my second question is on Power segment. There have been some media articles about us winning some orders from NTPC. So, just wanted to kind of know is that correct? Is that not correct? And while you mentioned that you'll not be unde rtaking any EPC orders, how serious are we going to be on BTG orders on the power side, on thermal power side?

Aditya, I think this was covered in detail by Mr. S arma, when we talked about sometime back at the early part of the call, that what's our plan. So, as the public domain news suggests, that we are well placed in some of the bids that has happened on BTG almost 6400 megawatts. We are well placed across 3 projects. Let us see how they come into a contracting opportunity in the current year or current quarter, I would say Q3. Mr. Sarma, would you like to add? Subramanian Sarma: I mean you said it. I think we should know within this quarter where we reach on this. As far as the tender conditions, this 6.4 GW in three locations, the customer will award two packages of the bundle to L1 and third one could go to the L2 bidder if they are able to successfully conclude negotiations. We will have to see. But I think looks like that we will have at least 4 gigawatt if everything goes well.

Thank you. The next question comes from Shrinidhi Karlekar from HSBC. Please go ahead.

So, very good to see 60 basis point kind of improvement in Infrastructure EBITDA margin. So, would you say that underlying margin improvement, if you look at separately the domestic business and international business are probably far higher and partly getting offset by mixed change towards international business?

So, Shrinidhi, I think I responded to specific question five minutes back. So, let me tell you that yes, Infrastructure margins have improved when you compare quarter -on-quarter. There has been an improvement. The margin trajectory in the Projects and Manufacturing portfolio is a cost, is a variation of the various projects execution across sectors, across states, across geography. So, basis the construct, we gave the guidance of around 8.2 to 8.25 for the full year. We are on a positive start, let me tell you, basis our H1 numbers. And we do expect that the H2 also, there are no such perceived headwinds in so far as execution is concerned across the entire projects and across the projects in all the geographies. So, hopefully, I think we should be at least meeting the guidance that we have talked about or we are referred to.

And sir, second related question is, when we guided, we will be around 8.2 kind of margins in the projects business in 2025 as well. How should we see these margins in the context of trend margins? These 8.2 margins are still below the trend that is possible considering how business has changed, both on the kind of orders that you are winning, as well as how the business mix is changing or you think that probably 1% to 2% below trend levels. So, some kind of guidance on how one should think about improvement over the next couple of years from when you exit in 2025?

So, let me tell you the projects that L&T has secured across the various segments in the P &M portfolio in the last 2 years, the momentum has been to pursue a profitable growth. That has been the underlying objective. Now, of course, as the project business, obviously the risk on execution always is there. And as we speak, we don't see any headwinds or external headwinds in terms of the project getting delayed in the execution. Now I was mentioning in response to a working capital in some sectors, the execution is delayed because payments is not happening. But a large part of the order book is coming under normal execution, both India-based projects and also international projects. And we have not compromised on our bidding philosophy in terms of taking projects and we are not compromising on margins. So, timely execution, timely completion will enable obviously improvement in margins from what they have been bid for.

And the last one, if I may, is your commentary on both Public Capex sustaining momentum as well as visible improvement on the Private Capex side. But sir, if you look at contrary, we are seeing that a lot of State Capex budgets are getting moderated. Even the Central Capex for key Infrastructure ministry is seeing some moderation and on the private side, both B2C as well as B2B product demand is kind of getting moderated. So, in that context, what I wanted to understand is, could you please elaborate what is the confidence that you see sustained ordering moment from both private as well as public side?

So, as far as Private Sector Capex is concerned, I guess the opportunities are still quite strong in so far as the entire expanse sector of real estate. When you talk about real estate, I am talking of healthcare, I am talking of data centers, I am talking of residential, I am talking of commercial. So, we do see signific ant amount of investments getting lined up as far as the private sector is concerned. In so far as core industry is concerned, we do see, like for example, the minerals and metals, if I had to talk about which is largely a sector where you have private sector investments, the total order prospects is roughly in the range of Rs. 45,000 to Rs. 50,000 crores. It's a mix of both domestic and international. So, domestic order prospects also is roughly around 50%. Now this is entirely coming from the minerals and metals industry or investment that have been planned. So, I would say that it could have picked up better, but it's not premature to comment that there is no private sector opportunity that is being addressed by Lars en & Toubro. Let me put it that way. So, wherever the prospects are there, these are all named prospects when we talked about the total prospects pipeline of Rs 8.08 trillion and we hope that many of these projects fructify.

And in the State Capex sir, last one.

State level prospects have come down relatively so because we do see some of the states looking to convert some part of the state revenues into subsidies and all of that stuff. To some extent, there is some drop. But I guess, let us say, given our structure of order book that we hav e, we are also going a little selective in terms of pursuing opportunities where we are sure our chances of winning are better and our chances of completing the project and getting paid on time is also better.

Thank you. Ladies and gentlemen , we would take that as our last question for today. I would now like to hand the conference over to Mr. P. Ramakrishnan for closing comments.

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

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