Larsen & Toubro : Earnings Call Transcript Q1FY23

"Larsen & Toubro Limited Q1 FY-23 Earnings

Conference Call"

July 26, 2022

MANAGEMENT: MR. P. RAMAKRISHNAN - VICE PRESIDENT, LARSEN & TOUBRO LIMITED

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Larsen & Toubro Limited

July 26, 2022

Moderator:Ladies and gentlemen good day and welcome to Larsen & Toubro Limited Q1 FY23 Earnings Conference Call. As a reminder all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing '*' then '0' on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. P. Ramakrishnan. Thank you and over to you sir.

P. Ramakrishnan: Thank you Nirav. Good evening, ladies, and gentlemen. A very warm welcome to all of you into the Q1 FY23 earnings call of Larsen & Toubro Limited. The earnings presentation was uploaded on the stock exchange and in our website around 6.40 PM IST. I hope you have had a chance to take a quick look at the numbers. As per past practice instead of going through the entire presentation, I will take you through the key highlights for the quarter in the next 20 minutes or so, post which we will get into Q&A.

Before I begin the overview, a brief disclaimer. The presentation which we have uploaded on the stock exchange and our website today, including the discussions during this call contains or may contain certain forward-looking statements, concerning L&T business prospects and profitability which are subject to several risks and uncertainties and the actual result could materially differ from those in such forward-looking statements.

During Q1 FY23, the Indian economy continued to exhibit resilience supported by relatively strong macroeconomic fundamentals and as evidenced by improving high frequency economic indicators. Despite global turbulence and rise in energy prices both government and the Reserve Bank of India have succeeded in maintaining fiscal and monetary stability in the country. We can safely conclude that, during this quarter, India remained a bright spot amidst continuing global "CHAOS".

Our group also reported a strong all-round performance in an otherwise seasonally weak quarter. Before I move further, I would like to mention here that effective April 1, 2022, that is the start of this financial year, the operating segments of L&T have been reorganized in line with the business strategy to be adopted by the company under its 5-year Lakshya plan 2026. We had articulated on this aspect when we spoke about the Strategic Plan roadmap for FY26 during the Q4 FY22 earnings call. Just to refresh, some of the existing segments have been realigned to reflect the group's Lakshya 2026 strategy. The changes are as follows.

Energy projects: This is the newly formed segment that constitutes the current segments of Hydrocarbon and Power to reflect the company's integrated pursuit of opportunities in a rapidly transforming energy sector, including green energy EPC opportunities.

The second segment is Hi-Tech Manufacturing; This being a segment that comprises the Heavy Engineering and the Defence Engineering business is being combined to leverage the extensive engineering, manufacturing, and fabrication expertise across the various customer segments.

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IT and Technology services: This segment earlier comprising of the listed three IT&TS subsidiaries that is L&T Infotech, L&T Technology Services and Mindtree will now so include the new age businesses of Data Centers and e-commerce and digital platforms. Both Data Centers and E-Commerce Digital Platforms are recently incubated businesses were shown under the other segment in the previous year.

Now we cover the financial performance parameters for Q1 FY23. Our group Order Inflows for Q1 FY23 at Rs. 418 billion, registered a y-o-y growth of 57%. Within that, the Projects and Manufacturing businesses secured order inflows of Rs. 281 billion for this Q1 registering a y-o- y growth of 85%. Our current year Q1 Order Inflows in the Projects and Manufacturing portfolio are mainly from Infrastructure, Hydrocarbon and Defence businesses. During the quarter, our share of international orders in the Projects and Manufacturing portfolio are at 33% vis-à-vis 15% in the Q1 of the previous year. The domestic ordering environment in Q1 was also significantly better compared to Q1 of the previous year. At a macro level, there was an improvement in domestic tendering and awarding activity. Secondly, we expect public Capex spends comprising of Centre, States, Public Sector Units in the current year to be better than that of the previous year. Hopefully, the private Capex would also witness improvement in the second half of the current year.Our order prospects pipeline for the remaining nine months of the current fiscal is around Rs. 7.6 trillion comprising of domestic prospects of Rs. 6.1 trillion and international prospects of Rs. 1.5 trillion. The broad breakup of the overall prospect pipeline of Rs. 7.6 trillion is as follows: Infrastructure Segment Rs 5.6 trillion, Energy Rs 1.6 trillion and Other Projects and Manufacturing around Rs. 0.4 trillion. Finally, we remain confident of achieving the annual guidance we gave on order inflows at the beginning of this year.

Moving on to order book; our order book at Rs. 3.63 trillion as on June '22 is once again at the record high. As our Projects and Manufacturing business is largely India centric, 72% this orderbook is domestic and the balance 28% is international. Of the international order book of roughly around Rs. 1 trillion, around 79% is from the Middle East and 11% from Africa. The remaining 10% is from various countries including Southeast Asia. Clearly the Middle East Capex in Infra and Hydrocarbon is on an upswing post recovery in the oil prices.The breakdown of the domestic order book of Rs. 2.63 trillion as the June is as follows; Central Government 11%, State Government 30%, Public Sector Corporations of State-Owned Enterprise at 42% and Private Sector at 17%. Approximately around 26% of this total orderbook Rs. 3.63 trillion is funded by bilateral and multilateral funding institutions. As you can see from the slides, 91% of our total orderbook is from Infrastructure and Energy. Again, within Infrastructure our order book is well diversified across various businesses like Heavy Civil, Water, Power Transmission and Distribution, Buildings and Factories, Transportation Infrastructure and Minerals and Metals. Finally, during the quarter, we have deleted around Rs. 14 billion of non-moving orders from the orderbook. Our share of slow-moving orders in the order book is just around 3%.

Coming to revenues; our Group Revenues for Q1 FY23 at Rs. 359 billion registered a y-on-y growth of 22%. International revenues constitute 37% of the revenues during the quarter. The IT&TS portfolio continued to report industry leading growth in Q1 as well. In the Projects and Manufacturing business portfolio, our revenues for Q1 FY23 were at Rs. 221 billion thereby

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registering a y-o-y growth of 23%. The robust execution in Infrastructure and Power within the Projects and Manufacturing business portfolio during the quarter was to some extent offset by other businesses. I will cover the details a little later when I cover each of the segments. We remain confident on achieving the annual guidance on revenue given at the start of this year.

Moving on to EBITDA margin; group level EBITDA margin without other income for Q1 FY23 is 11% vis-à-vis 10.8% in Q1 FY22, up by 20 basis points. The detailed breakup of the EBITDA margin business wise is given in the annexure to the analyst presentation. You would have noticed that the EBITDA margin in the Project and Manufacturing business for Q1 FY23 is at 8.2% vis-à-vis 8.8% in Q1 FY22. This drop of 60 basis points for the quarter is explained by cost headwinds and the change in the job mix. Despite the recent correction in commodity prices, our average procurement cost for the quarter was still higher compared to the corresponding quarter of the previous year. We retain our annual guidance on EBITDA margin in our Projects and Manufacturing portfolio at 9.5%. The recent commodity price correction brings in the much- needed relief but since our EBITDA guidance for the current year was constructed basis average price levels of FY22, we believe it is prudent to retain the margin guidance for the year at a same level at this juncture. We will have better visibility on improvements if any as the year progresses.

Our operational and reported PAT the quarter at Rs. 17 billion, registers a healthy growth of 45% over previous year Q1, largely aided by the improved group level EBITDA margin as well as improved treasury operations and a lower tax expense. The group performance P&L construct along with the reasons for major variances under respective function heads is provided in the analyst presentation.

Coming to working capital; our NWC to sales ratio has improved from 22.9% in the Q1of the previous year to 20.9% in the current quarter. However, this ratio has moved up from 19.9% reported as on March 22. NWC to sales moved higher on a sequential basis primarily due to vendor payments which fell due during the quarter. As we have stated before, Q1 of every financial year is seasonally a weak quarter for customer collections. Having said that, let me mention here that our customer collections for Q1 FY23 is substantially higher than that the corresponding quarter of the previous financial year. Our group level collections excluding financial services for Q1 FY23 is around Rs. 0.34 trillion vis-à-vis Rs. 0.27 trillion in Q1 FY22. Although we expect some interim volatility in the NWC to sales ratio for one or two quarters, will endeavor to bring down our NWC to sales ratio closer to 20% by March '23. Just to reiterate here, we had guided for NWC to sales ratio of ranging between 20% to 22% for FY23.

Moving on to the Balance Sheet; if you glance through the Balance Sheet given in the annexures to the analyst presentation, you would notice that at the group level, the group debt equity ratio has improved over March '22. We are at the same net debt equity ratio in June '22 vis-à-vis March '22. This is mainly due to repayment liabilities of the financial services business around Rs. 36 billion and development projects Rs. 19 billion offset by Rs. 23 billion increase at the parent. Some portion of our debt in the parent company is coming up for repayment and therefore

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this incremental borrowing at parent is largely front ended in an environment of rising interest rates.

Finally, our trailing 12-month ROE for Q1 FY23 is 11.5% vis-à-vis 17.2% in Q1 FY22. As you are aware, the trailing 12-month ROE for Q1 FY22 includes the benefit of the onetime gain on the divestiture of our Electrical and Automation business net-off exceptional items. However, on a sequential basis our ROE has improved from 11% in March '22 to 11.5% in June '22, an improvement of around 50 basis points. A robust business portfolio, improved working capital management, focus on cash generation/distribution and finally divestment of non-core assets will lead to better ROEs.

Very briefly I will now comment on performance of each business segment before we give our final comments on our outlook for the near term.

Infrastructure segment: On order inflows, our Q1 FY23 order inflows are well spread across various subsegments. Infrastructure segment secured orders of Rs. 183 billion for Q1, registering a healthy growth of 66% over Q1 the previous year. During the quarter orders well diversified across public spaces, metros, waste management and wastewater, minerals and metals, factories, data centers and power transmission and distribution. Our order prospect pipeline in infra for the remaining nine months of the current financial year is around Rs. 5.61 trillion comprising of domestic prospects of Rs. 4.76 trillion and international prospect of Rs. 0.85 trillion. The subsegment breakup of the total order prospects in infra is as follows; Power Transmission and Distribution would be around 19%, Water 22%, Transportation infrastructure 19%, Heavy Civil 18%, Buildings and Factories 20% and Minerals and Metals for the balance. The order book in this segment is at Rs. 2.64 trillion as on Jun'22. The book to bill for Infrastructure segment is around 30 months. The Q1 revenues at Rs. 142 billion registered a growth of 36% over the comparable quarter of the previous year aided by improved execution momentum as the COVID related challenges receded in the current quarter. Our EBITDA margin in this segment dropped from 7.1% in Q1 FY22 to 6.5% in Q1 FY23, largely impacted by input cost escalation and changes in the revenue mix.

Moving onto the next segment which is Energy Projects; the receipt of a large order from the Middle East in the offshore vertical of Hydrocarbon business buoys order book of this segment where the subdued ordering environment continues in the thermal power business. The order prospects pipeline of Rs. 1.6 trillion in this segment for the balance nine months is healthy. The order book for this Energy segment stands at Rs. 654 billion as on June '22 with the international order book constituting 58% . The Q1 FY23 revenues at Rs. 50.7 billion registers a growth of 3% over the comparable quarter of the previous year, that is largely attributed by healthy execution in the Power business on the back of robust opening order book. The Hydrocarbon revenues on the other hand was impacted to some extent due to client delays and supply chain issues. The EBITDA margin for the segment at 8.5% for Q1 FY23 improved compared to 7.5% of the corresponding quarter of the previous financial year. The execution cost savings aided Hydrocarbon margin where cost contingency release improves the Power margin.

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