Q1 Review: Strong Q1 For L&T, Approves Rs 10,000 Cr Share Buyback
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00:00 Welcome to BQ Prime. You are watching this special with the management of Larsen & Toubro.
00:05 They came out with a very good set of numbers, especially the order inflows have been very
00:09 good for this quarter for them. And joining me is R. Shankar Raman, who is the whole-time
00:14 director and CFO at L&T. Mr. Raman, thank you very much for joining us on BQ Prime.
00:19 My first question to you is on the order inflow. 57% jump year-on-year for the quarter. Can
00:28 you break down this order inflow for us and what percentage could have been a spillover
00:34 from Q1? Good evening. The order inflow of 65,000 crores needs to be broken up into those
00:46 which are contributed by infrastructure sector, which is about 40,000 crores. About 7,000
00:53 crores came from hydrocarbon sector and the rest, these two are the larger pieces out
01:01 of that. The rest came scattered across various other sectors. Among the infrastructure sector,
01:08 the heavy civil sector, sub-sector that we cater to was the beneficiary of a large order
01:16 in the high-speed rail segment. And the other large piece of order from infrastructure sector
01:24 came from power transmission and distribution business, where we won a large order from
01:29 Middle East for solar energy. We also won some hydrocarbon orders, both in India on
01:36 the onshore as well as offshore. And we also won an order in Middle East, in Saudi Arabia,
01:45 for an offshore facility. So, I think these are the broad components. All the businesses
01:51 procured orders, be it buildings and factories, be it minerals, metals, be it water, heavy
01:57 engineering, defence engineering, all of them procured orders. And fortunately, all of them
02:02 did better than what they did in the first quarter of the last year, collectively. But
02:06 if you want to isolate the big wins within this, the high-speed rail and the solar orders
02:12 actually take the cake. And what would have been any spillover? Is there a spillover from
02:18 Q4 to Q1? Something you expected in Q4 but got spilled over to Q1? Actually, we have
02:26 cases of both spillover that happened as well as spillover continuing. For example, some
02:31 of the defence orders spilled over from Q4 to Q1 and are spilling over to Q2 as well.
02:40 So, the timeline that the sponsors of these projects work does not necessarily coincide
02:48 with the calendar that we have on the quarterly cut-offs. But what is important for us is
02:54 the program alive. Is the program cancelled? And the good news is that if we can withstand
03:00 the quarterly spillages, the program is alive and kicking. So, hopefully, in one of the
03:04 quarters, including the current quarter, we should see some benefit. This slippage between
03:09 quarters has been a normal thing that is happening in project business for long now.
03:16 For example, the high-speed rail program. The program itself is slightly delayed. I
03:21 think the COVID interruption was a major reason for that delay. So, working to the original
03:27 plan, the wins that we have had in Q1 of the current year could have been Q3 or Q2 of the
03:35 previous year. So, to that extent, I think if the overall program gets deferred, pushed
03:42 to the right, our participation also gets pushed to the right. So, hard to say as to
03:48 this is the exact order that I targeted last quarter that came in this quarter. In the
03:53 infrastructure space, which is medley of orders, there is always a mix of this churning cycle.
04:00 And I guess so long as we are adequately compensated by orders that were not expected to come in
04:09 the current quarter for the orders that get missed, either because you lose them or the
04:16 program gets deferred. We are okay. But I think the more important theme to my mind
04:22 is the momentum. I think individual orders, we win and we lose. For example, our win rate
04:29 is typically around 20%. So, for every five projects that we bid, maybe one or maybe two
04:35 projects that we win. So, obviously, the system is geared for losing three. So, the order
04:42 loss has not been anything exceptional in this quarter, which is good news for us, so
04:47 that we have not got any less competitive or less eligible. And the momentum has been
04:52 sufficiently good so that we could afford to take the slippages of projects deferred
04:57 on our stride and date report good numbers.
05:04 I asked that question because you have a guidance of 10 to 12% growth on your order book. With
05:11 the Q1 order book, I was reading one of the Jefferies report, if I'm not wrong, it said
05:17 that you just need 2% more in the next nine months to reach that guidance. So, that is
05:24 the case. I just wanted to get an idea whether we should look at the order book on a normalized
05:30 basis and then look at the 10 to 12% guidance or you will go ahead and increase your guidance
05:38 maybe in the second quarter or third quarter.
05:41 So, the way I'm looking at it and the way the company is looking at it is, we reported
05:47 230,000 crores of fresh orders last year, FY23. And we guided the market that 10 to
05:53 12% growth is what we are working on for FY24. So, that would possibly take the 230,000 crore
06:00 to somewhere between 250,000 and 260,000 crores. Now, of which 65,000 crores is what we have
06:07 won. We have another lakh and 95,000 and for ease of understanding, let me say another
06:12 2 lakh crore worth of orders to be obtained. Now, mathematically, instead of working on
06:20 percentages and possibly feeling complacent, what the company is focusing on, where is
06:25 my next 2 lakh crore of incremental orders going to come from? And which are the projects
06:31 that are lined up? Which quarter are they lined up? Who's the competition? What is our
06:36 reason to win? There must be a right to win also. Is it going to be price point? Is it
06:41 going to be technology? Should we partner with somebody? Should we prepare the ecosystem
06:46 to partner with us as we bid? So, all of this actually results finally in the orders that
06:52 we bag. So, to that extent, I would possibly like to look at it as we need another 3 good
07:01 quarters, including the current quarter. We need 3 good quarters to be able to feel safe
07:12 and secure that we are on course with the guidance, which is the reason why I didn't
07:17 want to react on a particular quarter, because this 57%, 60% while they are impressive per
07:24 se, can also be the function of the position last year, because these are relative. I would
07:30 like to focus on absolute and focus on what exactly we need to do to reach the goalpost
07:37 rather than draw some comfort. And the risk with this is that we don't want to slip into
07:43 complacency.
07:44 Give me a sense of the macroeconomic conditions which is coming in and the kind of prospective
07:50 pipeline that you see, because we are going into a year where I think elections are going
07:55 to come in in various states and towards the end of the financial year, the country would
07:59 be preparing for the general elections also. If you look that and put that in perspective
08:05 with the kind of international orders that you are winning, which means 45% coming from
08:10 hydrocarbon for you, we see a shift globally from fossil fuel to renewable, but you're
08:18 still getting a huge amount of hydrocarbon orders coming in. Give me a perspective of
08:22 how this is functioning and how this is playing out globally.
08:28 One data point correction, Sajith, if I may, hydrocarbon won about 7000 crores of orders
08:36 in Q1 and out of 7000 crores, about 2500 crores was international orders. The balance was
08:45 domestic. So, the domestic happened to be more. But if I take the order book as a whole
08:53 of hydrocarbon, which is close to about 70000 crores, nearly 60% of that order book is international.
09:02 So, you are right in a way that there is a lot of international orders to be executed
09:07 in hydrocarbon. And to that extent, the wins that we are having in the area of power transmission
09:14 distribution, including the solar energy, is a good antidote to any potential slowdown
09:22 in the domestic. And those programs seem to be multi-year program and multi-billion dollar
09:30 program. So, our engagement with that program will continue for some years going forward.
09:36 So, that's the good part of it. Coming back to India, I think in the last few years, no
09:41 year have we gone through without an election in some state or the other. We've always been
09:46 having two, three states coming up for elections every year, particularly in the last cycle,
09:54 if you see. So, state elections, I think we are getting used to the cycle. And union election,
10:01 of course, is a big one. And it could be policy defining because we've had the benefit of
10:08 continuity of government over the last 10 years. So, to that extent, when the last election
10:13 happened in 2019, there was not much risk to disruption of policies. So, big programs
10:20 that were unleashed, be it the dedicated freight corridor or the high speed rail, was not at
10:26 a risk of disruption. Continuity was there. Now, we have to wait and watch as to how the
10:34 nation holds and whether there's going to be the same government, different government,
10:39 different government. And the risk of a different government is there would be a pause before
10:43 proceeding because most of these projects will go through some review, both from a viability
10:50 perspective as well as from priority perspective. And that's one risk we run. We can't hide
10:55 away from it. We'll have to hope for the best. But in terms of general theme, I find across
11:02 political parties, the need to feed population, the need to keep the nation in a positive
11:09 frame of mind is well understood. So, agnostic to political ideologies, I do think that providing
11:17 resources to people is given. Some ideologies believe in giving it free, some ideologies
11:23 giving it efficiently and charging for it. So, we'll have to wait and watch as to which
11:28 one plays out. But regardless, given the state of infrastructure in the country, given the
11:33 fact that we have to take growth more and more deeper into India, it cannot be that
11:38 only six to eight cities in the country provide employment opportunities. I think it will
11:45 be impossible for those cities to function. So, the need to develop alternate hubs for
11:50 employment generation is given. Now, the question is how we are going to make this program viable.
11:56 We have to make sure that goods, people and all the related stuff, we establish good,
12:02 efficient means of mobility. One reason why the government possibly is investing in roadways,
12:08 railways and all the network that is doing is both the need as well as the international
12:16 firms, the funding agencies are very supportive of broadening the growth opportunities within
12:23 the country. I think today there is not much questioning about does India hold potential.
12:29 I think everybody believes India holds potential. The only question that in mind is will we
12:33 have the right policy prescription, right environment, right enablers to realize the
12:38 potential. So, the infra funders, which are global agencies, have come forward and that's
12:44 a big plus for the government, whichever be the government, because doing it out of country's
12:49 budget has its own limitations. When you have these very long gestation, low interest cost
12:54 credit, I think it enables the projects to move forward. I do believe some of the large
12:59 metro rail program that we have been able to execute, the high speed rail, the freight
13:04 corridor have all happened on the back of this kind of credit lines. So, it's important
13:08 if the governments, whichever the government is, wants to be seen as inclusive, successful
13:14 employment generating, then they have to stay on the right side of these funding agencies
13:19 and that can happen only through credible large programs. It is in a way self-fulfilling
13:25 because the large funding agencies also supervise the program. So, the chances of good oversight
13:31 improves rather than leaving it to just local contractors or local municipalities to oversee.
13:38 Secondly, I think some of the learnings out of the past 10-20 years have also started
13:45 being built into project specifications today. Today, they say that 70-80% of the right of
13:51 way will be acquired before a project is put out for bidding. That's a big development
13:57 from what we used to see 20 years ago, where we have to just go into the project blindfolded.
14:02 We wouldn't know whether we'll get the next mile connected at all. So, there are a lot
14:07 of project risks, a lot of construction risks. Some of them have been addressed.
14:12 So, if you look at the year ahead, would you see that execution will be the biggest challenge
14:19 for you in the next nine months going ahead, while you look for the next two lakh crores
14:27 of orders as well, but execution would be the key focus?
14:33 Spot on, not only next nine months. I think if you look at the company a little long term,
14:40 it's one thing to get four lakh crore, five lakh crores of order book, but we need to
14:45 execute it well. And we can never afford to slip up on execution because much of the pre-qualification
14:53 hopefully will ride on successful completion track record. In fact, it is a cost that we
14:58 are propagating with all the authorities because the cost of infrastructure goes up because
15:05 the time overrun is rampant. People take double the time than what is anticipated. Consequently,
15:12 the interest during construction goes up. So, the project which starts as 100 rupees,
15:18 let's say, as project cost, lands up very easily at 180 rupees, 200 rupees, and it exceeds
15:24 the budget and busts the viability. Do you see any headwind to that?
15:28 No, no. I think it's not so much of an headwind. I think it is going to be a constant endeavor
15:35 to stay ahead of the curve on this. And it is easily said than done because I think every
15:42 project despite all the improvements that I just cited as having happened, still requires
15:47 multiple agencies, clearances, etc. We're still not there on single window clearance.
15:53 And how do you look at the margins, core margins in this whole execution? Because you are looking
16:01 at core margins of approximately 9% and above. While you are executing this, how are you
16:09 faced as far as getting those margins? Two things will have to play. Well, one is
16:15 we need to crash the time to complete the projects. Today, we are taking X number of
16:20 months to complete a project. We should figure out a way to do it X minus three, X minus
16:25 six months. That's one effort and that can happen by superior engineering, planned procurement,
16:31 etc. That is very much up our alley in the sense that it is internal, controllable, and
16:37 we have to engineer that. The other part is the resources availability.
16:43 You see, we can have the best of plans, but we need people to execute. Skill shortage
16:48 is becoming a concern as our order book grows. I think it is okay to have a 2 lakh order
16:56 book and feel comfortable that we have enough skilled workmen to execute them. When it becomes
17:01 4 lakhs, when it becomes 6 lakhs, then it's a different proposition altogether. So, as
17:06 the scale of the operations increase, the skill pool has to increase. Today, one of
17:12 the concerns is how do you expand on the skill pool? And that's again a challenge which will
17:18 take time to solve because this doesn't get developed overnight. You have to work with
17:23 this pool of people and make them convert them from semi-skilled to fully skilled or
17:28 unskilled to semi-skilled. So, these two are the biggest, according to me, challenges that
17:34 we have and that goes beyond the current nine months. And I wouldn't like to call them as
17:40 headwinds because headwinds means the wind direction can change and things can become
17:44 normal. These are some things that we have to work on constantly to make sure that we
17:49 have the right to win the next project.
17:51 Okay. I need to spend a few minutes on your buyback as well. You came out with a 10,000
17:57 crore buyback. What was the thought behind this buyback? Because we saw that happening
18:05 a couple of years back and there were some changes required in the regulatory framework
18:09 and that is now in place for you to bring this in. But 10,000 crores, will you be able
18:15 to bring in enough of operating cash-free cash flows to manage this 10,000 crore buyback?
18:24 In fact, it is accumulation of past few years cash flow that we are distributing. The purpose
18:29 behind buyback is to distribute to shareholders the profits that we have made with the money
18:37 that they have been interested with us for the first lot. So, it is a way of dividend,
18:43 if you can call that, except that dividend has a certain ring to it on an annualized
18:50 basis. So, you cannot one year go to 500 percent, next year go to 50 percent, third year goes
18:55 to 75 percent. It becomes very erratic. We believe in the philosophy of a steady growth
19:01 in dividend and today almost 40-45 percent of the profits that we earn on year-on-year
19:07 basis is given out as dividend. So, we are turning out to be a good dividend stock. What
19:14 this buyback will do is once in a while when you accumulate surpluses beyond what you need
19:21 for your growth, then instead of safekeeping that surplus and acting like a bank, we might
19:28 give it to the shareholders, make them feel wealthy, create value for them and they are
19:34 always free to use this money to come back and invest again. The whole idea of the concept,
19:40 not the idea, the concept behind premium on buyback is to provide those opportunities
19:45 to shareholders. If you are a holder of shares and you give your shares, participate in the
19:51 buyback program and the company buys it as a premium to the current price, you get the
19:56 premium and then if you are in love with the company, you can reinvest and reinvest at
20:03 a price possibly lower than the amount that you bought back, sold the shares back for.
20:08 Over time, the prices will levelize, but there will be these windows of opportunity. So,
20:14 I think from a shareholder perspective, it is a very interesting way to get some returns
20:19 going and we do believe that it will be shareholder value accretive move.
20:25 My final question is that, how does this place your working capital management as well? Because
20:30 if you are sitting on a huge order book as well and which requires a lot of working capital
20:35 and you have been trying to manage that for a couple of years, bring down the cycle as
20:39 well. How does this change or is it factored in the entire scheme?
20:46 The cash flow we have factored in the incremental working capital that we might have to spend
20:51 on, incremental capital expenditure that we might have to spend on, investments that we
20:57 have made to make in electrolyzer manufacturing or data center building, we have taken all
21:02 of that into account and we are still left with net surplus, which is a portion of that
21:08 is what we are sharing with the shareholders. I do believe in a couple of years, we should
21:13 be able to recoup the distribution that we have made to where we are pre-back in terms
21:24 of financial liquidity. But then we have to make sure that the working capital which you
21:30 have brought down considerably from 25-26% of revenue, we brought it down to 16-17% level.
21:37 We should continue to be as efficient and we should not invest or allocate capital indiscreetly
21:45 to assets or investments which are not going to be written accretive. So all those discipline
21:50 and guardrails we will have to do. If we do that and do the business well for which we
21:55 have the order book, we should be able to recoup this capital in about a couple of years
22:00 time and that's the confidence with which we are doing this.
22:02 Mr. Raman, it was a pleasure talking to you today. Thank you very much for joining us
22:06 on BQPT.
22:07 Thank you. All the best.
22:16 [BLANK_AUDIO]