Ladies and gentlemen, good day, and welcome to the Lasse and Antopro Limited Q4 and FY 'twenty one 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. Please note that this conference is being recorded. I now hand the conference over to Mr. P.
Ramakrishnan, Head Investor Relations, Larsen Antupro Limited. Thank you, and over to you, sir.
Thank you, Margaret. Good morning, ladies and gentlemen. A very warm welcome to all of you to this q four and FY twenty one earnings call of Larsen and Tubro Limited. We have with us on the call today our chief executive officer and managing director, mister Aishan Subramanian, and our full time director and chief financial officer, mister Shantaraman. The analyst presentation was uploaded on our website yesterday at 7PM.
Hope all of you would have had a chance to go through the same. Instead of going through the entire presentation, I will give you a brief overview of the performance in the first fifteen minutes or so. Post which, we will take q and a. Before I begin the overview, a brief disclaimer. The presentation which we have uploaded on our website yesterday and the discussions we will have on the call today contains or may contain certain forward looking statements concerning L and T's business prospects and profitability, which are subject to several risks and uncertainties, and actual results could materially differ from those in such forward looking statements or discussions.
FY '21 was a year that witnessed unprecedented change. It can be best described as the year of test for all the constituents of the Indian economic system, be it households, corporates, and the government. The financial year commenced with the lockdown, and the country had to face a deep contraction in economic output. However, to the tiny intervention from both the government and the Reserve Bank of India, the country recovered progressively with each passing quarter. The q one economic contraction was the most, followed
by a
shallow contraction in q two and q three recorded growth. Q four GDP numbers are yet to be published, but we do believe India would have degrowth between seven to 8% in real GDP terms in FY twenty one. Now coming to company performance, we have had multiple surprises in a COVID impacted year. Important is most of the parameters of our core business have come back to normalcy much faster than what we expected. Our ordering cost for the year at rupees 1,750,000,000,000.00 was achieved on the back of strong domestic wins in infrastructure and hydrocarbon segments.
We picked up very large and prestigious orders, notably the Mumbai Ahmedabad high speed rail, the bridge across the Rumoputra in Assam, and the EPCC package for the Rajasthan refinery. The order book at rupees 3,327,000,000,000.000 as of 03/31/2021 is at near record levels. The healthy and diversified order book provides us revenue visibility and mitigates cyclicality. Secondly, a predominance of public exposure in the order book around 83% reduces credit risk in these challenging times. Our revenues picked up momentum with every passing quarter despite experiencing productivity challenges due to the ongoing pandemic.
We ended the year with revenues of rupees 1,360,000,000,000.00. Just for reference, our q one revenues were rupees 210,000,000,000, q two at rupees 310,000,000,000, q three at rupees 356,000,000,000, and we ended q four with revenues of rupees $481,000,000,000. As you can see, there is a strong sequential pickup with every passing quarter of FY twenty one. The q four FY twenty one growth on a Y o Y basis was 9% higher evidencing return to pre COVID levels of activity. Our overall EBITDA margins for FY twenty one improved from 11.2% in FY twenty to 11.5% in FY twenty one, despite the headwinds emerging from the overhead under recoveries in a COVID year.
We have been most surprised on the customer collections front in FY twenty one. Thanks to the government for having adequately prepared itself in a COVID year through a large borrowing program. We witnessed strong cash flows in FY twenty one. Our group level collections in FY twenty one were rupees 1,260,000,000,000.00, whereas at a parent level in FY '21, we collected rupees $760,000,000,000, out of which q four collections was rupees $270,000,000,000. We ensure that the collection from customers also got passed onto our supply chain in a similar manner.
In addition to making normal payments, the government in a difficult year also supported contractors by releasing claims, retention payments, as well as relaxing bank guarantee requirements. Consequently, our net working capital improved from 23.7% as of March as of March 21. The robust operational cash flows in a difficult year enabled us to repay a part of our borrowings as well. Both our gross and net debt levels have improved at the parent level. We began the year with gross and debt levels of zero point four nine and zero point three one respectively, and we have ended the year with gross and net debt levels of zero point three nine and zero point zero four respectively.
Finally, as you may be aware, the e v e e and the the electrical and automation divestment was also concluded during this year. Now a quick summary of q four FY twenty one performance. Our order inflows for Q4 at rupees $5.00 7,000,000,000 registered a degrowth of 12% on Y on Y basis, mainly due to some tender deferments and delay in award closures. As said before, our q four revenue at rupees $481,000,000,000 registered a growth of 9% on Y on Y basis. Our recurring tax for q four at rupees 34,000,000,000 registered a growth of 12% Y on Y basis.
On a sequential basis, though both revenues and overall PAC are up 3533% respectively, again, largely due to normalization on the easing of COVID restrictions prior to the onset of the current COVID second wave. Our return on network for FY '21 is at 16.2% vis a vis 14.8% last year. The return on network for FY twenty one includes the gain on the divestment of the E and A business. Some comments on order inflows and order book before we proceed ahead. Our Q4 orders at rupees $5.00 7,000,000,000 were largely led by infrastructure, hydrocarbon, and heavy engineering.
Power generation continues to remain subdued. Within infrastructure, we did bag a couple of Middle East orders in q four. Significant orders during the quarter were received across most segments like factories, hydro and tunnel, metros, special bridges, nuclear power, rural water, renewables, hydrocarbon offshore, and minerals and metals. There is a visible focus on CapEx in the union budget, which should fortify as the year progresses. Our projects business prospect pipeline for FY '22 has improved by 8.5% as compared to the level witnessed at the start of FY '21.
We see total prospects of rupees 9,600,000,000,000.0 rupees for FY '22, comprising of domestic projects of rupees 6,560,000,000,000.00 and rupees 2,500,000,000,000.0 of international projects or prospects. For FY '21, the prospect pipeline was rupees 8,350,000,000,000.00. Infrastructure has the major share of these order prospects at almost 77% followed by hydrocarbons at 16%. Our order book at rupees 3,270,000,000,000.00 as at 03/31/2021 comprises of around 79% domestic orders and 21% international orders. Around rupees 1,000,000,000,000 of the current total order book of 3,270,000,000,000.00 is funded by multilateral agencies.
This represents around thirty first 31% of the total order book. The split between domestic and international order book is rupees 2,580,000,000,000.00 rupees and rupees $688,000,000,000 rupees respectively. Further, the split of the domestic order book of rupees 2,580,000,000,000.00 is as follows. Central government takes a share of 9%, state government 31, public sector corporations 44%, and private 16%. The overall group performance, financial parameters are covered in the presentation along with explanations for major variations.
I hope you all had a chance to go through the same. The only point I want to mention here that the profit from discontinued operations operations net of tax in q four reflects the final post closing adjustments envisaged that are pending discussions and closure. Now I come to the segment performance before I move to the final part on outlook. Infrastructure. The ordering momentum continued in this segment in q four as well.
During the quarter, we received the order for the largest solar PV plant in Saudi Arabia. Full year order inflows in this segment are rupees 1,200,000,000,000.0 rupees, registering a growth of 4% despite the muted ordering activity in the first half of the year. Our bottoms up prospect pipeline in intra is rupees 6,970,000,000,000.00 for FY '22 vis a vis rupees 6,350,000,000,000.00 in FY '21. The share of international prospects to this total is higher around 24%. The revenues in q four at rupees $262,000,000,000, up 5% on Y on Y basis.
The strict safety protocols amidst continuing pandemic pandemic moderates the progress. Full year revenues in this segment is impacted due to the slow progress in h one due to lockdown. Q4 and FY margins improved due to the tapering of certain stressed jobs in the transportation infrastructure sub segment, comma, reduced expected credit loss provisions due to collections of overdue sums and claims settlements in a few projects. It is important to note here that our full year margins have improved despite under recoveries in a COVID year. I come to power segment.
The award activity departments we were witnessed in the thermal power space during the current year. However, for us, this segment is largely unimpacted because of a large opening order book and a couple of quarters of our departments will not impact the fortunes of the segment in the near term. Having said that, we did receive an FGD order, the flue gas desulfurization order in Q4. The robust revenue growth in Q4 and twelve months is a function of a good opening order book. The margins for q four and f five twenty one remain subdued as major part of the order book is yet to cross the margin recognition threshold.
The previous year, q four and f five margins were higher due to a favorable customer claim settlement. I come to heavy engineering segment. The robust order wins in the nuclear power business, around 1,200 crore of fleet orders from NPCIL, drives the q four FY twenty one order inflow. The full year order inflow also registers a smart recovery over the previous year. The ratio of domestic and international in the order inflow for FY twenty five '21 is sixty five thirty five.
The pickup in execution across multiple jobs leads to a strong revenue recovery in q four. The robust q four margins is reflective of job mix and claims. The variation in the full year margins explained by a settlement reached with an international client pertaining to a warranty claim. I come to defense segment. The ordering momentum in defense engineering segment remains subdued in q four.
Multiple small order values continue to replenish the existing order book. The recent policy pronouncements are encouraging for the domestic industry, and we remain excited about the future outlook. Implementation over may happen over the course of time. The better progress in multiple jobs drive healthy revenue growth in q four. The cost savings drive margin buoyancy again in the q four quarter.
I come to hydrocarbon segment. The healthy domestic wins in q four replenishes
the order
book. Further, improved activity levels at our fabrication yards and peaking of revenues in the onshore vertical aided record revenue recovery in q four. The margin buoyancy in q four is the result of cost savings and job mix. The variation in full year margins is explained by under recoveries in a COVID year. Our bottoms up prospect pipeline in hydrocarbon for FY '22 is rupees 1,400,000,000,000.0 comprising of domestic prospects of rupees 600,000,000,000 and around rupees 800,000,000,000 of international prospects.
With Brent prices stabilizing about about $60 per barrel, we expect the return of international awards in FY twenty two. Secondly, we are also witnessing a lot of bunching up of prospects now due to the muted ordering in the hydrocarbon sector over the last four to six quarters. I come to developing for a development project segment. This segment includes our power development development business that mainly comprises thermal and hydropower plant and the hydrovac metro and the investment in the L and T infrastructure development projects JV. As you are aware, the roads and transmission line concessions are housed in L and P IDPL and consolidated only at the pack level under the equity method.
The strong q four revenues in this segment is largely contributed by the power development business. As strong electricity demand drives revenue growth in Naba, the Hyderabad Metro ridership is reflective of the continuing pandemic. The segment margin in q four is impacted by OpEx under recovery in Metro. Coming to Hyderabad Metro, the Hyderabad Metro, we believe, is a remunerative long term concession. However, it has been severely impacted due to COVID.
Now it is important that the capital structure of the L and T Hydroback Metro Rail should be such that the asset can sustain itself. From loans refinancing to getting support from the state government for soft loans and claims for soft past overruns to explore monetizing TOD rights, to assistance from L and T, all such options are being explored. The Metro has about sixty years of remaining concession left. And since the construction risks are off the table, we will now have to deal only with operational risks. All the options will be explored to improve traffic through network effects and last mile connectivity.
We will work closely with the fare fixation committee to set up annual fare escalations based on cost increases. We have around 18,000,000 square feet of transit oriented development, which will be monetized over time. We will keep you posted on the developments. Now I come to the information technology and technology services segment. For us, this segment comprises of the three listed companies, L and T Inputec, L and T Technology Services, and Mindtree.
All the three companies have declared the results, and the same are available in the public domain. Without getting into too much of details, let me mention that this segment has largely been unimpacted due to COVID, and it continues to grow. You would have noticed that the margin improvements in this segment has been driven by a combination of improved utilization, better onshore offshore mix and operational efficiencies. I come to financial services segment. The Q4 revolve around strong pickup on rural disbursements, robust collections, improved net income margins, and maintenance of adequate liquidity on the balance sheet.
Post the rights issue, the business has sufficient growth capital. The loan book has decreased to rupees 94,013 pro as in March 21 compared to rupees $98,003.84 pro as on March 20. The drop is largely due to focus on collections, portfolio sell down, as well as the reduction in the decopus book. I come to the last segment within others, which comprises of reality, construction and mining equipment, rubber processing machinery, industrial walls, and smart world and communications. The strong q four revenue growth led by strong the smart world and communications, construction and mining equipment, rubber processing machinery, and industrial walls.
The q four margins in this segment is largely stable as compared to q four of the previous year. Before I move to environment and outlook, I would like to spend a couple of minutes on our ESG journey. I'm happy to report that L and T has been upgraded to BB by MSCI in March 21. Secondly, we are having active discussions with leading ESG rating agencies to explain our progress on the various ESG initiatives being carried out by the company. Our group is eight decades old, and we have been at the forefront on many of the sustainability initiatives long before it was mandated by law.
In other words, we have tried to implement many of the ESG initiatives both in letter and spirit. Further, through disclaimers in our integrated report, we have also clarified our position on the involvement in controversial weapons in the defense engineering segment. For the benefit of everyone on this call, I state below. The business the defense engineering business does not manufacture any explosives, not ammunitions of any kind, including cluster ammunitions or anti personnel land mines or nuclear weapons or components for such munitions. The business also does not customize any delivery systems for such ammunitions.
Finally, in our analyst presentation that has been noted, we have included a couple of slides on energy conservation and renewable energy, occupational health and safety, our green portfolio, as well as the group's initiatives towards employees, contract work plan, and society in times of the COVID pandemic. The data provided in these ESG slides are subject to audit. Our integrated report f y twenty one will be ready in a couple of months. Lastly, we are working to create a long term ESG framework that would get integrated with the five year strategic business plan, FY '22 to FY '26. This should get ready in a couple of months, and we will articulate on the same at an appropriate time.
Coming to the last part on environment and outlook. During the year of 05/21, our country has demonstrated tremendous economic resilience despite these deep lockdowns, reverse light labor migrations, supply chain distributions resulting into GDP contraction in the initial part of the year, followed by a progressive pickup in the second half. Further, the growth momentum has been given a flip with the finance minister announcing an investment focused budget. Just when we thought the worst is behind us, the country is impacted by the onset of a more ferocious second wave of COVID, which has unfortunately impacted many states today. Having said that, I wish to highlight here a couple of positives and how the current wave may not disproportionately impact economic activity as happened as it was witnessed in the previous wave.
Firstly, movements are permitted this time around, though in a restricted manner as against their full lockdown. Secondly, vaccination programs have commenced in full swing, and hopefully, a good part of the population should get covered over time. The RV with an economy accommodative monetary policy and the government with this enlarged fiscal spend continue to provide the base level support to the economy. For the reasons just mentioned, we believe that the recovery is delayed, but not delayed. As for the various reports, the infection stop should start subsidize subsiding sometime this quarter, and we could witness domestic recovery from q two onwards.
Elsewhere, most parts of the global economy are also gradually recovering from the impact of the COVID nineteen pandemic, but it continues to remain uneven across countries with economic activities in many countries still below pre COVID nineteen levels. With oil back above $60 per barrel, we should see a pickup in GCC CapEx as well as improved prospects in Africa and Southeast Asia. This view is confirmed by our bottoms up aggregation of international order prospects for FY '22. Despite the ongoing challenges, we expect up to a low to mid teens growth in order inflows and revenues, while maintaining stable core business margins for FY twenty two. We will endeavor to maintain the networking capitals around the sale same levels as of March 21.
In the backdrop of the COVID nineteen pandemic and the resultant challenging economic environment, the company, upholding the primary victim of maintaining the health and safety of its personnel, will continue to aggressively pursue opportunities for growth, both in domestic and international markets. The focus would be on large project wins, efficient execution of its large order book, productive utilization of its monetary resources, all targeted to ensure a sustainable business model and thereby improve shareholder return. Ladies and gentlemen, thank you for your patience hearing. We will now move on to q and a. As I said earlier, we we have discussed today our CEO and MD, mister Essen Subramanian, and whole time director and CFO, mister Archanter Raman on the call today, who will be taking the questions.
To make the best use of the available time, I would request all participants to focus on questions related to business strategy and other relevant macro matters. The IR team led by me and my colleague, Harish Parai, would be happy to take the detailed bookkeeping questions offline. Over to Margaret.
Thank you very much. We will now begin with a question and answer session. Anyone who wishes to ask a question may press and one on the touch tone telephone. If you wish to remove yourself from the question queue, you may press and 2. Participants are requested to use handsets while asking a question.
Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Mohit Kumar from DAM Capital. Please go ahead.
Good morning, sir, and congratulations on a good quarter in a very, very challenging environment. So my first question is on the macro has become uncertain, especially in domestic segment. International was barely anything significant in FY 2021. What is your expectation for the order finalization, especially in domestic and Middle East? And can you please give some granular detailing segment wise and geography wise?
That's the first question.
Shankar Raman here. See, in terms of the prospects, infrastructure prospects continue to be the largest piece in our overall pipeline. We did mention during the course of the commentary by my colleague, P. Ramakrishnan, that we assess the prospect pipeline for FY 2022 to be around 8% to 10% higher than what we saw last year's this time. But of course, last year this time was a very difficult and different scenario, so it's not really comparable.
So we'll focus on what we are able to see ahead. A lot of our belief stems from the fact that the government is focused on economic recovery through investments in key sectors. Fortunately, the sectors that they are talking about are the sectors that L and D is deeply involved in. Several facets of construction will get busy if the government plans comes through. There has been expanded fiscal allowance for the government through the budgetary provisions and endorsement by the parliament.
The government can both state and center borrow a little more liberally than what they did what they do normally. And secondly, the international money, especially the developmental funding is focusing on India because like us, they do believe India has rich prospects. So we do think that a combination of government fiscal allocation and the international funding should see us have opportunities to bid in the areas of heavy civil or water or power transmission distribution, etcetera. So we think that the granularity within infrastructure would be these areas. It's pertinent to note that in FY 2020, the infrastructure segment bagged orders worth about INR98000 crores.
And in FY21, we have bagged orders worth INR1000000 crores. So if you see over a two year period, and one of which has been considerably impacted by the pandemic, We think that around INR 8 lakh 9 lakh crores of infrastructure spend happens in the system, and we have a share of possibly 15%, 16% out of that. So going by that same logic, we do think that out of the INR 6 lakh crore worth of infrastructure opportunities, we should be able to get that 15% to 20% share because I think country still needs healthcare facilities, country still needs transportation infrastructure facilities. Urban condition continues to be a problem and a headache for municipal corporations. So given the thrust on climate both metros as a means of mass transportation as well as green energy in form of solar, etcetera, is getting the required attention and is also getting international funding support because these are a broader theme on preserving the deterioration in the climate conditions.
We do think that the opportunities around data centers and IT spaces will continue to engages because there's one industry which has actually thrived in the pandemic has been the technology industry. And India is blessed with abundant talent for this technology innovation. And we are also serving as a large backbone for global organizations, be it their normal processing or R and D centers or any of those kind. So we think that some of the inflationary pressures that are there in the raw material prices will also make it interesting for the manufacturers of these products to step up their capacity. So we do think that some amount of activity will happen around the factory space as well.
The government has also been focusing on spending a fair bit around public spaces and we've been seeing stadiums and large public facilities being put up, including the hospital facilities. So we think that the Buildings and Factories segment also will see some traction. So considering all of this, we do think that notwithstanding the current low sentiment, we have to stay positive being in business. We do believe that this time over, the country has got a little better wherewithal to deal with the virus as compared to the previous time. Previous time, we didn't know it was a black box.
Now we have vaccination, we have health programs, etcetera. The challenges around rolling all of that out to cover majority of the population remained, but notwithstanding that and hoping that things will get better from second quarter, we are looking to the current year as promising year for domestic markets. International markets, you are right, I think the previous year was a little uncertain. But as compared to India, many of the international geographies have actually done better on the COVID management because their population was much lesser and the complexities, societal complexities were also lower. So we see some of the economies coming back to growth more.
With the rise in crude prices, I think Middle East also will begin to revisit their plans for hydrocarbon except that nowadays, like in India, our presence in Middle East is more widespread across verticals. We are not only dependent on hydrocarbon in Middle East. The way we are scaled up in India across verticals in much more modest way we have scaled up in The Middle East. So I think we will get engaged with their multiple programs. Africa has been a land of opportunity, but except that it is too large continent with several countries and very, very different dynamics, sociopolitical dynamics.
So we're trying to mark the spots where we can operate safely and be meaningfully contributory to the local society. So we have taken steps to explore and gain some foothold in the businesses of power transmission, distribution, water, like India, in fact, a few notches lower than India. Basic facilities are still a luxury in parts of Africa. So I think much of the investment will happen around the base infrastructure and not the sophisticated infrastructure. We do think that will happen.
Water has been a major issue. I think both preservation, transmission distribution, storage treatment as well as detalination solutions are being explored in India. It's lifeline for the country. So considerable attention of the states have been going towards water and we are almost pan India in terms of water opportunities. So I think between all of this, there is a good reason for us to remain hopeful.
Of course, the pandemic permitting and things getting better from where we are today in at least two odd months' time.
Thank you for the clear answer. My second question is that on infrastructure segment, there has an improvement EBITDA margin. So can you please quantify the one offs in the particular quarter And how confident you are of maintaining this margin given the commodity inflation in the past few months?
There is no one off that I'm able to recall in the margin improvement of either quarter four or the current year, current year meaning FY 2021. It's a function of several things that happened. Margins unfortunately in our business is not just a function of one or two parameters. It's a function of several parameters, the mix of jobs, the progress on those jobs that we achieve, the ratio of jobs which are at margin recognition threshold, the degree of cost releases that happen when jobs get completed and handed over, the release of cost contingency hence, also the price variation settlements that happen during the course of execution as well as in the conclusion of the job, all of this kick in. On top of that is the execution efficiencies, our ability to procure smartly, our ability to execute the first time right, our ability to automate the processes.
One of the interesting things that the company has been doing over the last few years under the direct push given by our CEO is digitalizing the entire process of manufacturing, construction, engineering, We are today far more evolved as a company to use automated levers, use machine learning and the intelligence around the data that we gather on productivity of many machines in the businesses that we deploy them in. Now we have connected machinery, we have tracked workmen, we have got productivity measures defined for many things, including drone based surveys, etcetera. So consequently, I think while inflationary pressures in terms of input costs being select commodities or wage, etcetera, would be a matter of, in fact, regular attention for the business. These productivity levers enable us to be far more consistent in the quality that we produce, far more precise in our estimation in quantities and in bidding process. So it's overall efficiency that I would attribute to for improved margins.
As far as our confidence about this being a continuing factor, I think the effort would be to ensure that we sustain margins. If you have been watching us over a long period of time, and I'm talking about long period of time, I'm saying, let's say, last ten, fifteen years, we have been through several cycles of commodity prices going up and down and the inflationary pressures playing out as well as the economic development being swing between high and low. But one redeeming feature of our performance through this period of ten, fifteen years has been the margin trajectory. We've always been around eight to 10%, 8% to 12% margin company in terms of bands. There are often one off years where some projects that we execute has cost overrun, that's inevitable in our business and not getting adequately compensated by cost savings in other projects.
In such cases, we have some spike in terms of costs and hence margin deflates. But notwithstanding all of those, we've always been rock steady in terms of our margin profile. So we do believe that we have the wherewithal to deal with these volatilities and maintain the margin trajectory that we are going for.
Thank you. That's very helpful. Best of luck.
Thank you.
Thank you. The next question is from the line of Sumit Shashore from Axis Capital. Please go ahead.
Good morning, sir. My first question is, where are we in the private CapEx cycle presently? The share of private orders in the India order book of NLT is at a record low. How do you see this shaping over the next one to two years?
Currently, it's about 18% and it's been so last year as well. So not much change has happened in the last few years. In fact, even pre COVID, if you really trace back from 2016, 2017 onwards, I think the economy has been a bit lackluster in terms of investment. And the private sector having got out of a bout of investment between 02/2006, 02/07 to about 2014, actually we are taking a breather. Much of the private investment we saw spike up is in the areas of public infrastructure assets.
And many contracting companies recycled their profits and capital into owning infrastructure assets, so did L and T. And the belief was that on completion of these assets, there would be a takeout that is feasible. The insurance companies and the pension funds were actually ideal candidates for owning all of these assets, would possibly step up and invest in these assets and help initial investor to recycle the capital. But that is not to be. And I think the challenges of owning public infrastructure and dealing with the government concessions continues to evolve.
And it possibly is still a little distance away from being the ideal model concession agreement, which will facilitate very smooth transition of completed assets to the next set of owners. But having said that, the industrial CapEx has always been a function of opportunities in the economic environment. Whenever we find that the products and services of the private sector companies are looking promising, the private sector entrepreneurs have come in forward and invested. I mean, it's sort of once in several years development like what possibly the investments that some of the major companies did when they changed their focus from traditional businesses to new age businesses. But we do think that once the inflation stays at a steady clip, the monetary policies continues to remain attractive for capital to be invested and the global markets for products and services continue to remain stable and positive, the investments will happen.
The format of private sector investment can vary. It need not be only on industry. We have seen that it be on logistics. It was in services. It was also now moving towards supply chain infrastructure as a country and some health infrastructure as well.
So I think private sector capital will first have to delever. Most of the balance sheets that I see are levered now. In the next couple of years, I expect them to unlock some capital, repay some debt, create headroom for their investment. But my belief is over the next two, three years, the private sector share could move from this 18% to possibly anywhere between 2530%.
Thank you. My second question is we saw the high speed rail contracts, particularly a large order last fiscal. On that base, you have given a guidance of decent growth. What are the big ticket order prospects for FY 2022? And when I say big ticket maybe $30,000,000,000 plus for L and P both domestically and overseas, which areas do we
see these contracts coming from?
See, I don't think it's a good idea to just focus on big ticket orders only because these kind of orders like the one in high speed rail, that's not happening every now and then. In the past, we've had opportunities to build all the international airports in India. So they became big ticket at some point in time. And then we have this high speed rail. Otherwise, in our country, we believe in comfort of numbers.
The government tenders are generally or public sector tenders are generally more geared towards attracting more participants. If they aggregate all the bids or the projects into very large projects, very, very few companies will have the balance sheet capability to bid. L and D might bid, but I don't think the clients would prefer just receiving two bids or three bids. They want to see possibly six, seven, eight bids. And that can happen only when you break up the projects into its sizes.
So I think it is not going to be possible for L and T to only focus on big prospects. It will continue to focus on modest more modest projects. But having said that, I don't see large bids like the high speed as a normal thing. It's one off and lumpy.
Thank you.
Thank you. The next question is from the line of Puneet Gulati from HSBC. Please go ahead.
Yes. Thank you so much, and congratulations on great earnings. Would you be able to comment upon whether the under recoveries in the past year are likely to get paid or not? Where are the discussions with the government and
other clients?
See, normally all these discussions go all the way up to completion of projects. I mean, you can visualize, you can step into the shoes of a client and visualize that you commissioned a contract, the contract does go through twists and turns and many of these are understandable, documented. So the clients are generally empathetic to what has happened. The underrequiries have happened because we were not allowed by the circumstances to perform. So I think the clients do realize the situations.
So I think instead of guessing what would be the outcome, our approach has always been to complete the jobs to client satisfaction, not use these as excuses for abandoning the project or not completing the project. Our business teams have put their lives online in making sure that they go ahead and stay connected, committed to the project and its completion. We do believe that with many of them, most of them being repeat customers, there is a deep relationship between L and D and success of their own enterprises. We do believe that there will be fair consideration given to all of this. And I should hope that through conversation and negotiations, we should be able to recover much of it, whether we recover 90% of it, 80% of it, etcetera, time will tell.
But we are reasonably confident because I think we are well prepared to hold these conversations.
And I presume that once this comes in, they will only provide an upside to a margin. There is no risk of any write off from the previous year.
Yes. The costs generally are getting accounted as they are incurred. And of course, just as there is an opportunity for upside right till the end, till the execution completion of the project, There is also cost escalation prospects right through till the end. The job is not done until it is done. So we've been balancing this quite well as an organization.
I suppose we will continue to do that going forward. Whether it's only upside and no downside, again, time will tell. But our endeavor would be to retain the upside and not let downside slip in.
Okay. Got it. Secondly, can you comment a bit upon what drove the margin improvements in defense and heavy engineering both seem to have done quite well this quarter?
Yes. As they complete large projects, did mention in another context that when projects get completed, the cost efficiencies completely play out because we bid for projects based on estimated cost over two, three, four, five years depending on the length of the duration of the project. And as the project gets completed, the efficiencies play out. Some of them do it progressively through the quarter, some of them do right at the end. Normally, we do operate with contingencies, cost contingencies because we don't know until the project is done as to what will come and hit us.
There's no point in releasing margins ahead of time, paying tax on it later to write back and not get the tax concessions. So many of these areas, you mentioned about defense, heavy engineering, etcetera, have been large order completions, in relation to their business, not in relation to intra business, completion during 2021. And some of them, in fact, in heavy engineering also included some extra consideration for early completion. So I think it's been featured, but generally the margins for these businesses are very reflective of high-tech manufacturing that we are engaged in. So we do believe that the margins would be at a considerable premium over the infrastructure margin.
Okay. Excellent. My third question is on the pace of construction right now. We are hearing a bit about exodus of migrant city. Are you seeing the same thing or is it more media related?
No, I don't think it's media related because I think it is a reality that last year we lost considerable amount of people. In fact, the strength came to almost 60,000 people in our various sites, and it was a massive, massive effort by our teams to get most of them back. As we closed the quarter, March 21, we were operating at close to 240,000 people in our various sites. And we were looking given the large order book that we have now, we were looking to actually step it up to possibly 2.75 lakhs But this second wave has thrown its banner in the wheel now. We have a new issue.
Only difference this time is rural India is not spared from this pandemic. I mean, are enough reports to indicate that the villages are not necessarily more safe than the cities. So we've been carrying on extensive communication to our workmen saying that it is safe to remain in L and D sites and not necessarily risky proposition considering the lack of healthcare facilities in their hometowns and the fact that thanks to some indecision of our large public who participated in huge gatherings and were scattered back to various villages carrying with them possibly their disease. So I think there has been a reduction of twenty percent of the people having sort of wanting to go back out of their anxiety to villages, etcetera. But it is nowhere near the mass exodus that we saw last year.
But we do hope that with the plateauing of the infection rate and death rate coming down particularly in the large cities and towns that we operate our projects in, the workforce will begin to see sense in staying safe at where they are. After all, company is taking enormous efforts to step up on the healthcare facilities that are provided at our labor camps including running quarantine centers and providing health kits and ambulances and stuff like that. So I think they will realize the safety of staying and working at our sites rather than running home.
Excellent. That's very useful. Thank you so much and all the best.
Thank you.
Thank you. The next question is from the line of Ankur Sharma from HDFC Life Insurance. Please go ahead.
Yeah. Hi, sir. Good morning, and thanks for the opportunity. A couple of questions. So one was on the intra segment growth for the quarter, you know, so at about 5% overall.
And when I look at the domestic piece, it's about 3%, coming off of slightly weakest base of last year. So just trying to understand what are the constraints for one of our largest segment, if not the largest, in the company? Is it labor? Is it payments being slow? Are there any other constraints which led to this slightly subdued growth in the quarter?
I'm not sure whether the base is small because I just mentioned a little while ago, infrastructure sector close to INR 1 lakh crore last year. Actually, is INR 98,000 crores. And this FY 2021, we have won orders worth INR 1 lakh 2,000 crore. I think it is massive number.
Sorry, I'll follow the sales, sorry, not the orders, I'll follow the execution.
Okay. As far as execution is concerned, I think infrastructure by definition are little longer term duration as compared to the normal, let's say, a factory order or a typical residential building order, etcetera. So the execution does pick up speed as the project progresses. The initial period often goes in getting the engineering cleared and the procurement planning done, etcetera. It gathers space.
If I were to divide these projects into two halves, two thirds of the work happens in the second half and one third of the work happens in the first half. Depending on the mix of jobs that we have at any point in time, be it a quarter or a year, the majority if it is going to be falling in the one third bucket, you will find softer execution. And if you find majority on the other bucket, then obviously you will see pickup in pace. The execution challenges remain around the clearances, time delays around clearances, the right of way that unfortunately infrastructure business and the project involves the right of way especially projects with linear access for land acquisition and compensation settlements and now we have additional layers of environment clearance and then the public interest litigations. All of that the companies go through.
In many of these projects, it is not possible to have all of this pre cleared and then the project given so that the execution happens almost in a robotic manner. It doesn't happen that way. Many of these clearances are taken as we go along, and that is the way the project business is. So to that extent, the challenges are centered around access clearances. Our ability to manage a large workforce has been time tested.
We do think that, that will not be a challenge unless of course there are disruptions like the current times where people have other reasons not to assemble at sites. Productivity and skill upgradation is a major task. I'm not calling it as a difficulty, but it is a task. And as we try to automate our construction and delivery capabilities, we also make sure that the workforce that come in are more aligned to these improved productivity norms. As we keep scaling up our operations, we need to naturally increase the number of people we employ either through subcontractors or otherwise.
And once you have these larger number of people coming and several of them possibly not adequately trained, safety does become a big issue. And I think the company is spending a lot of energy in making sure that the safety protocols are well understood, well defined. And as and when we keep having new people come into our sites that these guys are aware of what are our expectation out of these safety standards. You should realize in a construction site, the laborers, the gang keeps turning around at least four times a year, either because of harvest and sowing requirements back home in their agricultural part of their in family or because of weddings or because of festivities. The churn in the labor camps happen easily four times a year.
So every now and then we have to deal with training a new set of people. So productivity, safety, etcetera, becomes challenges for a company like us, especially since we place so much emphasis on these.
Fair. Okay. That's helpful. Broadly then, the current order book of close to INR $3.30 odd crores is broadly executable? Or do you see any sizable slow moving orders there?
Generally, we have been of the past few years, we have been purging slow moving orders out of our backlog, not because clients have canceled those orders. It is just that our assessment that the order book that we reflect should be a workable order book. So every now and then this, you know, spring cleaning happens of of the order book that we have. We do believe that the order book that we have is workable. There's always a possibility of two percent to 3% of these orders developing some slowness.
That's the standard thing that we have observed over time. So barring that, I think this order book is workable order book.
Fair. And just one question on the order inflows and you've given a pretty detailed kind of answer on potential orders. But when I look at orders, starting from February, there has been a marked slowdown in terms of order finalization, and that's what kind of continued into May as well, especially from the state side. Even when I look at our full year orders, excluding the high speed and when I look at the state specific orders in, say, water or T and D, that's clearly been a little subdued. And given the COVID and the state focus on controlling that, do you believe that even going into 2022, it's more of a second half when you see state kind of ordering coming back once this whole COVID thing is kind of resolved?
In a non COVID period, my reading has always been that a lot of action picks up in the second half of the year because of the budgetary reasons for consuming the budgets etcetera. A lot of work happens in quarter four where either awards are given or project is commissioned or even settlements of payment happens because there is a focus on consuming the budget to be eligible for additional budget in the budget year for the state governments and general government projects. So I think there has been a bias towards second half, no doubt. And like last year, this year, the first half first quarter at least so far. The government host state and center is so preoccupied with safety of people.
I can understand that the attention is a little diverted at this point in time. But we do believe that by the time confidence return to the system that the healthcare infrastructure is able to cope with things, vaccination is better done, etcetera, etcetera. We do expect from August things to improve. This was the pattern last year as well. So I expect the FY '22 to be pretty similar.
So I'm not reading much into the slowdown as you rightly observed between March and date. But I do expect things could change.
Fair. And sir, if you could also on the Inphna orders of close to about INR 1 lakh INR 3,000 crores, if you could kind of break that down into VNS, water, T and D, heavy service, the break up which you normally give so that we can have a better comparison over the previous year?
You see, water and power transmission normally are the bigger lots out of this because Pan India issue that happens. So these are around 20,000 crores sized businesses. Then we have the buildings and factories around about 10,000 odd crores size and the transportation will be around 11,000 crores, 12,000 crores. And heavy civil has been a big year for us with the high speed train order of INR 20,000 So we are possibly looking at heavy civil at current accumulation at about INR 71,000 crores. So that broadly will add up to your INR 1 lakh crore that we have.
Okay, okay. And just one last one, if I may just squeeze in. On the margins specifically, and I think this was also a previous question, so we've seen pretty sharp improvement, heavy engineering, defense at close to 29%, even hydrocarbons at 13. And when I look at the press release, there are some mentions of some claims that will win some lower ECL provisions, etcetera, also sitting there. So just to clarify, I think you mentioned that it's more of job completion and less of claims.
Is that how we should read it? It's more of better mix, better productivity and less of claims over there. Is that how we should read it?
Generally, in our project business, claim settlements is part and parcel of our life. It is embedded in every quarter. There are some quarters where the claim settlement plus jobs reaching margin recognition threshold combined. There are also some quarters where the claim settlement and handover and hence cost contingencies release combined. So very difficult to pinpoint saying this is what it said.
If you have to do that, will have to get into each of the 1,000 jobs that we execute to see what has contributed where. It's a very, very tough ask. But broadly, you can conclude that these spikes are function of the job mix at a particular point in time rather than anything unusual or abnormal.
Understood. Great. Okay. Thank you so much and best of luck. Very helpful.
Thank you. The next question is from the line of Venu Baig from IIFL Securities. Please go ahead.
Yes. Hi. Good morning, sir, and congratulations for a good operating performance in the balance sheet repair that we have seen. So my first question would be on the margins for the intra business. Though historically, we haven't seen any clear correlation between the commodity prices and operating margins, but we haven't seen we have not also seen the unprecedented jump in steel prices the way we have seen in the last quarter or so.
So when we look at your broad margin guidance of flat numbers at eight and a half percent what we saw last year, does this bake in cost implications because of inflationary impact on fixed price project or some hit coming on that side as well? Because until two years back, before we had the provisions for transportation and last year for COVID, our margins and infra used to be nine to 10% range. So if you can help us understand what are we baking in terms of soft margins for '22, and by when do we expect core infra margins to head back towards double digit level?
See, I think it's a function of several things, right? I mean, as the country evolves, as the competitive landscape becomes more and more mature, Ability to sustain double digit margins in infra business particularly where the prequalification is getting lower and lower. So function of our margin reporting is also depends on the economic moat that gets created. Now it is good from one perspective that there are multiple people who are capable of bidding and delivering because one L and T cannot build entire India. You need multiple agencies.
So from one perspective, it is good that there is competitive pressures. And it is also equally important that as we upgrade our participation in project business, the investment that we need to do to keep our skill levels high also has to be accounted for. We cannot let I mean, the kind of skill that we needed to build an airport was very different as compared to the skill that we needed to put up a residential complex. And the kind of skill that we need to now deliver the high speed rail or the Transarbor Bridge across the sea is again very, very different. So every time when this is to be done, it has to be reinvested.
Skill has to be reinvested. In IT industry, I think people are able to very easily accept the reinvestment of skill and accept in the margins. The same thing happens in our industry also. Except that the play is half, IT industries are able to report 20% to 25% PAT in our business despite all the risk of working under the sun and the rain, we'll end up making possibly 8% to 10%. But as a mix of portfolio that we have between commoditized infrastructure build that we do and the sophisticated infrastructure that we do and depending on how much of it is outsourced, how much of this is in sourced because we have an integrated model of engineering design manufacturing as well as delivering on the construction.
Depending on how integrated the model operates, we've been operating on a band of eight to 12 and you can take refer back to our performance over a period of time that the band has been between 812%. Depending on the mix, depending on the complexity of the job and the competitive landscape, we've been operating at 12%. And I remember on such calls, whenever we had reported around 12% saying that this is not likely to be sustainable. Nowhere in the global EPC landscape will you find this kind of margin. So and also the fact that we are now stepping out, we are into Middle East and 35% of our presence in terms of order book is international between Middle East, Africa, etcetera.
And all these countries require investment. And where does the investment come from? Investment comes from redeploying the money earned in projects only. So to that extent, I think we are quite okay in looking at the margin profile of this 8% to 10% band as compared to 8% to 12% band, given the way we look at building our business going forward. Well, our effort is to keep moving up.
We have, as you might have heard, about 60% of our projects have passed throughs. So to that extent, all these inflationary pressures will have some way of readjusting the price with the customers. Of course, 40% of the jobs are fixed price contract, but we know that we are bidding for fixed price contract as we sit down to bid. So there is cost cushions that gets projected, especially when we sit down to price the bids. And hopefully, these inflation leasing will operate within the cost cushion.
So my belief is that when we talk about stable margins, it's more a directional thing that we are giving. We do expect FY two to continue to have challenges. There are definite unknowns in the year ahead because I don't think we are back to normal times as said. So given all of that, I thought the best effort for the company would be to make sure that it hangs on to the margin that it has been able to make. But despite COVID, we did improve by 30 basis points.
So effort would be to see how to keep moving up, but I don't want to speculate on a commitment today. But the trajectory, the focus of the company is clear. It will work to optimize on March.
Sure. That's helpful. So the second question would be to understand, globally, now we are seeing the entire energy transition towards decarbonization. So you're at L and T. How are we looking at this opportunity, and are there any businesses except for the power generation portfolio which would face challenges on account of this?
So what kind of steps are we taking to improve the capability towards an extension energy technologies and practices?
We are looking at it more as an opportunity than a challenge because I think to construct something, you'll have to destroy something. So to that extent, including business models, need to make way for newer models. The entire energy space will go through transition. The way the fuel was being used, way hydrocarbon industry operated, the way the power industry generally operated, all of that is undergoing change. The company is I think streets ahead of the competition in India insofar as this transition is concerned.
You would have read in our reports that they won one of the largest solar project in Saudi Arabia. We've been working a lot on water technology both in India and water solutions both in India and overseas. We have today hydrocarbon and power as two leading businesses, which will evolve into greener space. Already our buildings and factories have adopted green technologies, considerable amount of we are many of our buildings are certified as green buildings. So to that extent, I think it is the energy space that will see the transition.
Company has set up task forces to explore the new opportunities. And I think we are in the middle of the work that we are doing on this. And hopefully, in some time, we should be able to spell out the specific plans that we have. But we have seized those opportunities and we are working aggressively at it.
Sure. And one last question, if I may. Any update in terms of the restructuring that was being worked out for Hyderabad Metro, progress and discussion with bankers and divestment of the power assets? So has that also hit the the second wave roadblock or some things are in progress on that side?
No. I think these are all irons in the fire. There are lot of discussions that are happening. But as you know, we don't want to throw the baby with the bathwater. These are top class assets in terms of their functionality.
It is unfortunate that these assets are receiving attention at a discount to their potential price because of the environment. Because people who want to buy these assets have a lot of options today. There are a lot of distressed assets available. So there must be a very good reason as to why they pay premium to our assets as compared to an alternate asset that is available. So hence, the discussions are taking more time.
We are okay with it because I think it is important to find a good home for all of these assets. We do think that the power assets will move towards closure. I'm not in a position to exactly predict the timeline because I think internally we've had challenges in meeting the timeline that we have set for ourselves because of this environment. But we do hope that sooner than later we can move towards some of those solutions. And so far in Hyderabad Metro, it's a very, very it's a top class asset housed in a very long concession, but unfortunately completely exposed to the pandemic.
Today, the ridership is next to nothing considering the restrictions and the lockdowns and all of that that has happened. So the restructuring has to have multiple efforts. The bank loans that were raised during construction has to be refinanced. The efforts are on towards doing that. We also need to monetize our transit oriented development space.
The efforts are on towards that. And as you know, any real estate transaction in a time where there are a lot of uncertainties around utilization of space, particularly commercial because the transit oriented development that we have is commercial. It's understandable. So that's also work in progress. We have been having several rounds of discussions with the government on formation of fare fixation committee as well as the grant that they would be required to provide.
The good news is Telangana government in their state budget has accommodated INR1000 crore allocation for metro projects. We have to make sure that we find a way to translate that through the bureaucracy of the state to find its way to the project. But all these are when you deal with governments and especially deal with governments which at a time are more preoccupied with healthcare, that takes a lot of effort. But my sense is that during the course of the year, these multiple steps one by one we need to tick off and move forward. Meanwhile, we hope that the ridership would improve.
But ultimately the solution would be if the ridership improves for the project and for ridership to improve, I think normalcy has to come in. It's a fantastic transport solution, very transformative for And Hyderabad is a very growing metropolis. And unfortunately, of the people who commute or who we thought they will commute are all IT industry people. And all of them are working from home. So to that extent, I think there has to be some redefining of the work arrangements for the Metro to come up.
So I think you're going to keep hearing about the Metro being a work in progress for some more time. And I don't think it's not an easy one step solution. But rest assured, I think all the powers that be in the organization are working hard towards finding these solutions.
Sure. Thank you so much and all the best, sir.
Thank you.
Thank you. Ladies and gentlemen, we would request you to please limit your question to one at a time. The next question is from the line of Amish Shah from Bank of America. Please go ahead.
Thank you for the opportunity and congrats on the results. My question is actually still on margins. You spoke about productivity gains, but specifically within the fourth quarter, the company has also reported improvement within gross margins. And this is certainly something that the company is doing to circumvent the impact of rising commodity prices. So if you can please share some perspectives on what are we doing to, you know, not have the commodity price impact us.
And from an FY 'twenty two perspective, is it fair to say that commodity prices will hurt margins, but productivity gains will help cushion that impact?
That is right. I think not only productivity gains in a very limited way, but I think the overall cost efficiencies will also kick in because I think one of the things that the pandemic has taught us is to work in different ways, which helps us in containing some of the costs, which we used to take it for granted in the past life. In so far as margins are concerned, think one of the important levers also last few quarters, we were pushed back by some of the stressed projects in the transportation infrastructure sector where cost overruns were actually deflating the margins. And in quarter four, the transportation infrastructure business has returned to black, having left behind those stressed projects. So one of the large businesses coming back to black also helps the margin recovery, which is what is expected to be normal.
We actually slipped back because of some of these cost overruns. But we hope that, that will be a thing of the past and we should be able to move forward. The order backlog that we have, which will currently translate into revenue for FY 'twenty two appears healthy. Much of these have been bid through and won through the period where the inflationary pressures were visible. Whether we are completely insulated or not, time will tell.
About 60% of the projects we have thought of insulated by price variation formulas. The other 40% whether the inflationary assumptions that we have taken, whether it plays out needs to be seen. Of course, not all of this needs to be bought today. See the procurement also happens over time and we have some headroom to time the procurement as well. So I think the company is a very seasoned project execution company.
So I'm sure our teams will try to find levers to optimize. And secondly, we are also large buyers. So the relationship with our vendors normally transcend beyond small transactions. So we'll also try to find out a way deal with the supply chain on some of this, negotiate well. And of course, the customers appreciate extraordinary times.
If there are going to be extraordinary price movements, there will always be an empathy to the current situation. And they do realize that I think the project cannot prosper on the ills of a contractor, right? I think there has to be a healthy relationship. So I'm sure we will deal with this. It's not the first time we are in this kind of situation.
We have been there in the past. Have sort of survived, managed. So I think we're hopeful.
Okay. And then finally, two quick questions. One, right now, the skew of order book is completely in favor of state governments in comparison to central government. But from an order flow perspective in FY 'twenty should we expect the ratio to move the other way around? And finally, I also wanted to ask about the large $6,500,000,000 of cash balance that we have on books.
So if you could please share some thoughts on what are we planning to do with that too?
See, insofar as percentage skew, it depends on which projects come through and which don't. But I think it is safe to presume, I think, state followed by PSUs followed by central government will be the picking order. So it's important that the state government find their means either their own means or through funded assistance to go through with their projects. So I think that percentage I don't expect in the context of FY 'twenty two to be very different, give and take a few percentage points. So far as cash balance, I think 47%, you would have read about we having declared INR 18 per share dividend and on top of the INR18 that we did as extraordinary earlier.
So the regular dividend of INR18 per share represents almost 46% payout of the recurring profit after tax of the company, which I think is a fairly good share. Whether it's fortunate or unfortunate, I do not know. But because our portfolio business includes financial services business, SEBI in their wisdom are considering the consolidated debt equity as one of the criteria for allowing the standalone L and T to do buybacks. We had approached SEBI two years ago with a proposal. And SEBI said that you run financial services business, so we'll have to take the debt of financial services along with your debt and to decide the buyback post the debt level post buyback is up to the prescribed law, which can never be because financial services by nature is to borrow and lend.
So we've tried in vain so far in convincing Sebi that that's not the right way to go. So unless the regulatory mindset changes to pass cash back to shareholders in terms of buyback seems to be a bit challenged policy wise now. But from about 28%, 30% payout, we have stepped up to mid-40s now. And I think that is something that should keep the shareholders interested. Now we obviously have built in some cash buffers because of the extraordinary pandemic situation.
It is not normal for the company to have this kind of cash reserves, but it has done so because of just in case when the liquidity in the system gets on to panic mode, etcetera. And given our commitment to the huge order backlog that we have, we can never run out of cash for maintaining our contractual commitments. So there is a buffer that we are carrying, but that's more time point in time situation. We would like to use that we have created this buffer partially by operations and partially by borrowing as well. So we'd like to possibly also run down the borrowing out of the buffer.
Plus, we are having a large project on hand in terms of Hyderabad Metro. Last year, we allocated about INR1000 crores to Hyderabad Metro. We might have to keep considering INR1000 crores to INR2000 crores of reserve for that business as well. So if we do that and find some long term solutions, I also expect shareholders to enjoy some share price appreciation. Today, I do believe share price of L and T is depressed because of this exposure to Hyderabad Metro, and we are able to find some solutions to that.
The gains to shareholders will come from multiple parts. One is the larger dividend payout that we are doing. Second is possibly the better performance and better appreciation of share price. This is very helpful.
But just to clarify, are you saying that special dividends can possibly be a norm for the initial few years?
I am not sure whether you can call it a norm because special dividend is special, so we need to have an occasion. So let's hope we get occasions.
Okay. Thank you. Thank you, Alisa.
Thank you. The next question is from the line of Laveena Kudros from Jefferies India. Please go ahead.
Yes. Hi, sir. Sir, I just wanted to understand how is management looking at L and T finance. Is that a business you'll want to continue to be running in five years' time? Or is that something that you will look to restructure with time?
Just your thoughts over there, please. I
think it's part of our services business portfolio. And I do think that the business has opportunities. It has done well over the past twenty years. It's not a green on in the sense it's been there for in our portfolios twenty years. And I think in our credit delivery system, there is a space for non banking companies.
So at the moment, our thinking is that we will continue to keep that as part of our services business and manage it well so that it can also contribute to the shareholder value creation.
Okay. Thank you. Thank you. The next question is from the line of Girish Achipanya from Morgan Stanley. Please go ahead.
Hi, sir. Congratulations, Parashar, on your reappointment. I have just two questions. You know, in the media call, I think you did mention some growth guidance. So if you could clarify what exactly did you say on the revenue growth side by an order.
So was it low to mid teen on a core business, or was it a concern? And secondly, just on the D and C side, congratulations, the fatalities are down to twenty five. So you can just highlight key steps you're taking already to bring this down further?
Yes, thank you. See,
in terms
of margin guidance, let me articulate once again. Last year, we were not in a position to indicate anything at all because we didn't know it's a new situation, completely new situation. This year, helped by the recovery of quarter three and quarter four and looking at the order book that we have, we have made some assumptions that the current wave would plateau and possibly things will begin to return back to normal from Q2 onwards. That's one big assumption. The second big assumption is the government will rediscover its path to implement the budgetary plans that they announced in February by continuing to invest in the economy.
The third big assumptions that we have made is the kind of market support for funding these projects would continue to happen and the country would be destination for some of these investments. These are fundamental assumptions to our outlook. Our outlook for 2022 has been one of growth. Last year, we were looking at degrowth and our best case scenario was to meet up with FY 2020 levels. And I think we almost got there.
And I think it's credit to my business colleagues for having got us there despite a five month hiatus last year. So this year, our mindset is to grow on the basis of FY 2021 numbers. We are they're not in a position to hardcore the guidance as we normally do because of, A, it shouldn't appear very speculative and misplaced. So the way we are looking at it is that if I'm looking at growth, both in terms of orders and revenue, our projection seems to indicate that anywhere up to mid low teens to mid teens could be the potential for this growth to play out. Where exactly the growth percentage lands up, we will know as we go along because even now as we speak, we have still not solved all the uncertainties ahead for the year.
It is more out of mindset, hope, optimism that we are making this projection. So we said anywhere both revenue and order inflow anywhere up to low teens to mid teens is what we see and we said stable margins. Now revenue is function of our execution of order book, which is there with us now. So I think the execution headwinds permitted, we should be able to move forward and execute because we are not dependent on winning an order this year to realize revenue for this year. They are all in the bag.
We'll have to only find a way to have them executed. Order inflow is a little more difficult to predict because of the uncertainty inherent in that projection. So we are putting out a best guess guesstimate if you can. And hence we have set a range of growth up to this place.
And just on the ESG point, sir, fatalities in this time?
Yes, I think we're not happy with twenty five. Actually, we are our mindset is a zero fatality company. Just as we are saying, are zero emission company. So twenty five bothers us, so did forty one. But every quarter, we have a very detailed discussion at our Board, the highest body in the company about each of these cases.
And a lot of details have gone into. I think workman safety is something that we constantly have to work. We're doing a fair bit of work on this already. Think every site, every morning there are safety protocols and drills that are done etcetera, etcetera. But there is always this case of stray workers or malfunctioning of an equipment or an accident.
We've had things like people resting under a shade of an equipment and the equipment gets disengaged and runs over them or whatever. So all these kinds of mechanical malfunction also has contributed. We have worked very hard to bring it down, but I don't think we would like to rest. We want this to be zero, fatality to be zero. Very hard to prescribe that this will happen by two quarters, three quarters, four quarters, but the effort is towards that.
And considerable amount of internal communication is happening. And since everybody is connected for work on mobile, the amount of small videos, safety videos plus we use ARVR technology to buy these equipments and make workers wear them and see them before they start working in heights, etcetera. So I think considerable emphasis is being done.
Thank you, sir, and wish you all the best.
Thanks.
Thank you. The next question is from the line of Amit Mehawat from Eden Rise. Please go ahead.
Yeah. Hello, sir. So I just have two questions. First for mister Subramaniam. Sir, in your assessment, so last year, you know, COVID did impact far better than what we thought.
This year, do you think in terms of site execution, the kind of compliance we have to follow, that is the reason why our guidance in 2022 is far lower on a low base? Or do you think we are being more conservative? That's my first question, Sashi.
To answer your question, COVID did affect us last year, and I think we put in sufficient measures to come out of it in the fourth quarter. And we had practically got back our momentum and the sales and profit growth in Q4 reflects that. One never expected the second wave as it has happened. It has happened in the magnitude that it has happened. It has happened.
And one has to be a little cautious about it from that perspective. So what Arasar has indicated is low to mid teen growth is basically a double digit growth for for the year. We will see how it pans out because of this uncertainty from the COVID still around us. To make bold statements is not correct and not proper too as there is caution being exercised in all aspects of operations, including supply chain and and such other aspects of our work. Let's hope that with the huge measures that have been taken both by the central government, state governments, and many organizations, including ours, that we're able to cover it within the next couple of months.
And if that can be done with the learnings of last year and with the measures that have been taken, which are deemed to be adequate this year, hopefully, we should we should move forward more positively. But one is not in a position to predict it. So let's not look at it from a low base of last year. What one has to look at it is that there is a huge backlog of hand backlog at hand. One has to take it forward.
Basically, our people and the the company is prepared to go ahead and and and full blast on that, But one has to look at the enrollment and be cautious about what it is, and one has to be circumspect towards it, and that's what we are trying to put forth.
Thank you, sir. Quickly on second question is on our ESG initiatives. Now as we understand, defense business has been one of the perception problem, if I can if I recall it, especially to a lot of western investors. But do you think like other companies are thinking on the engineering side, we have defense and non defense business. Some of them can put the defense business in a different vertical, but that has problem with DRDO and Ministry.
So any thoughts you have on that? Can L and T think of putting those debatable businesses from ESC compliance on a separate you know, as a business, in a separate entity? Or do you think that is something which is not in our active thoughts, sir?
I think let's not exaggerate this problem beyond what is required. Okay? I am not sure why we got classified in the way that we have got classified. Our defense business is nothing but precision engineering and system integration and certain radar and other works that we do. We have clarified many times and extremely clearly that we are not into bombs, ammunitions, cluster ammunitions, and so on and so forth.
And therefore, to keep on saying why you're into the different business is not right. L and T is into businesses which are appropriate from the nation's point of view, from taking our infrastructure point of view forward, and from a national point of view forward. We do certain precision engineering and certain system integration, which we which we believe is an extension of our engineering and manufacturing activities from that point of view. And therefore, to classify us as some kind of a big defense contractor is not right. Maybe one can even think of taking taking the name of defense and calling it precision engineering or something like that, but that's exactly what we do.
And in in my opinion, to put it separately, to classify it separately is not correct because the kind of challenge that we have to have free flows from our manufacturing into into the so called precision engineering system integration and back into other areas as an vendor request. And that is what is the strength of the organization all about. There are a lot of engineering and learning in all of this which we which we partner. For example, today, DRDO wants to make oxygen generators. We have about $3.75 crores of orders, and then they quickly make these oxygen generators.
Now why is it was given by DRDO to a defense business? It's because they feel they have the engineers, the the people involved there, the people who can quickly understand this and quickly put it together. Now if it was separate, I don't think we'd
be able to do it
because the process engineers are part of hydrocarbon. The the certain amount of process engineers are part of our minerals and metals. And all these engineers come together, both as engineers and the fabricators and manufacturers to put it all together. That's how the company function. In my opinion, to make a dance and to make a drum and dance out of it is fine, but we are nowhere involved in any kind of ammunitions or bombs or cluster munitions, etcetera, to be classified any such.
Thank you. That's helpful. Sir, just last question for, you know, mister Shankar Raman. Sir, out of all the provisioning cycle that we've made, the claims that we've submitted for around COVID time, Where are we in that cycle? Maybe FY 2021, if you can help us understand the impact, plus the impacts of recoveries that has happened and possible number in 2022,
that will be helpful. Thank you. No, it's difficult to quantify because we are still pedaling the cycle. And it's a constant process. So I think we are in reasonable place.
It's I don't have the data to say how much of what we have submitted as compensation we have got. I can only tell you that majority of the cases, the time extension that is required, that's the first step to be taken in all of this has been obtained. So I think that's a good first positive step.
That's helpful, sir. Thank you.
Thank you. We would request participants to please limit your question to one at a time. The next question is from the line of Priyanka Vishwan from Nomura. Please go ahead.
Yeah. Good morning, sir. So my question is regarding would you give some comment on the on your reality business? Because as you see that we are, again, probably in a second phase of COVID and some bits of lockdown type situations in Mumbai. So how are you seeing the sales or inquiry momentum, and how do you see the year ahead, particularly on this piece?
Like providing some numbers, it would be helpful.
Hey, Suneet, are you saying or should I?
No, you go
ahead, Arasthan.
Okay, fine. Thank you. See, our reality business is a very measured business. It's not that we are all over the country. We are in select markets.
We are in Mumbai. We are in Bangalore. We are in Chennai. And consequent to Hyderabad Metro, we are present in Hyderabad. Much of the projects that we are doing are the land that has been made available by the parent company when it moved its manufacturing facilities, etcetera, to most cost competitive towns from the major metros.
So we have time because we have not paid any current cost of acquiring all this land and hence the interest meter is ticking. These are properties of the company which has been invested many, many, many, many years ago. So to that extent, I think we have the ability to time the launches. We are able to do it in phased manner. We are not forced to build everything and then try to put out in the market.
So some demand supply readjustment we constantly do. We've had a fairly reasonable year last year and maybe helped by the Maharashtra government's reduction in stamp duty. Since October and particularly in the last quarter of last year, the sales of Mumbai real estate properties that we were developing were pretty brisk. Bangalore has also been selling. Intrinsically, the project is extremely well located and people who have visited the development are very, very pleased with the development that we are offering.
And then Bangalore still continues to be hub of end people working in the well paying IT industry. So I think the tendency to own residential apartments early in their life is a big catalyst for demand to be there. So we do find, given that we are very measured in our launches, the demand to be sustainable. We obviously, as we scale up and go beyond L and T owned premises and look for joint ventures, we have a couple of them announced in Mumbai already. They've had a good start in quarter four.
We'll have to wait and watch as to what happens this year. But somehow my experience is that investment in a house is much beyond just the season or no good or bad. I think it's a very fundamental household decision that people take. Earlier, there used to be a rush to book as the projects get announced. Nowadays, the tendency, given that the real estate sector has seen many failed projects, the tendency is to wait for near completion before people make the booking.
So to that extent, has been some readjustment of the booking preferences in the market. Regulations like VIRA has possibly helped because it gives them comfort about regulated space to operate in and the people will not be left high and dry at the mercy of some unscrupulous developers. Companies like us have an inherent advantage because of brand L and D. I think and rightly so people do believe that whenever we launch a project, we will launch complete within time before time and hand over. So good quality within cost.
So I think that is going to be a major, major help. But at the moment, it's a space where we are very watchful and careful about what we will do going forward. But we have projects on hand to keep us busy for the next few years. We have enough projects on hand.
So, sir, what I meant was actually, like, what is the kind of the, like, sales outlook that you are possibly seeing for this year?
Please understand, the sales outlook, as represented by numbers happens when the projects are handed over. There's a change in the accounting regulations. And for real estate, the current guideline is that your account has sales only when you hand over a completed apartment. Earlier, it used to be like construction business. Progress used to be reported as sales, having booked an order.
That's no more the case. So you'll find all real estate companies having huge volatility in their quarterly numbers because in some quarters, are able to hand over more flats, some quarters, we're not able to hand over more flats. For example, FY 2021, the entire year, we handed over about 400 flats. In FY 2020, we handed over about 800 flats. So if you compare between FY 2020 and 2021, the handover has got lower.
So the sales booked has got lower. We are looking at handing over equal or more number of flats in the current year. But again, it depends on whether people are ready to move in. We had a very funny situation. The flat was ready, but people are not willing to come in and take position and because of COVID and whatever travel restrictions, etcetera, etcetera, etcetera.
So it's a multiple levers are at play here. So at the moment, it is safe to say that we will do same or better as compared to FY 'twenty one.
Yes, sir. Extremely thankful for the detailed answer, sir. That was all from my side.
Thank you. The next question is from the line of Deepa Krishnan from Goldman Sachs. Please go ahead.
Sir, this is Fulket. Sir, I just wanted to get a sense over the medium term of some of the businesses like our power development business, shipbuilding, defense. In many of these businesses, we've been seeing underutilization of capacities. So as we look at the next four to five years, and I guess your next five year plan also, there's time for that to be drawn out, How should we look at some of these businesses where utilizations and profitability have lower?
Power development is a business where we will monetize. We have no ambition of running a power utility. Some of them have been built in the past for a certain context and those objectives having been met, the assets that we currently own as power development assets will get monetized. So I don't think there is any thinking around creating further investments in power development area. So far as the shipyard is concerned, it's a very precious asset.
You would know in this country to get waterfront. That too is very close to a metropolis is next to impossible. We have been similarly lucky that we had an opportunity to acquire that waterfront area. And we are putting that waterfront area to multiple businesses. It is not only for defense, we are also using it for fabricating hydrocarbon structures, etcetera.
So any it's a large space, so anything that requires a large area for fabrication, etcetera, and which needs to be transported, that becomes a handy facility. There are continuing interest in looking at large naval program. The government policy should permit both in terms of speed of thinking and action as well as their mindset to utilize these facilities for ramping up. I think India's requirements is well documented. I think the Navy, since we're talking about shipyard is in need of definitely supplementing their arsenide.
So it's important that multiple next generation vessels, be it a survey vessel, be it a patrolling vessel or be it even a landing platform dock or a washer, there is enough and more to be done. Except that the government historically has been extremely slow and very, very reluctant about private sector participation and the public sector shipyards are all overflowing with backlog running up to five to ten years delay. And whenever we have got an opportunity, we have overemphasized the point well by delivering much, much ahead of time, years ahead of time, except the government is surprised at the speed at which we are able to do and they're not ready to take delivery. That's another problem. But as an asset, it's extremely precious.
And I think it's country's responsibility actually to use this asset well. And I think the governments, the powers that be are very, very familiar with our capabilities around this space. So in terms of the other defense businesses,
I don't think it
is underutilization of capacity because it's not so much of hardware and space lockup. It is lot of engineering talent. As Mr. Subramaniam was mentioning in another context, they're all fungible skills as well. The engineers are precious, the resources for the country and they're all very well trained engineers.
We do today, 2% to 3% of our revenues is from defense. So to that extent, I think the defense business is busy in its own way, except that can it ramp up and do much better? Obviously, I think there is potential to do that. And we've not really ramped up and waiting for work. Mean, like in the case of IT, etcetera, you don't have 20%, 30% sitting at a bench.
There's no such thing that is happening in terms of underutilization. We always say potential for business is much higher than what it is today. I don't think it's a case of underutilization.
Sir, in the same breath, any ROE targets over the medium term?
We want to get back to 'eighteen for sure. We came up to about 15.3% in our last part. In 2016 to 2021 strategic plan, we started 2016 at 9% and the idea was to end 2021 at 18%. We were well on our way because year on year there has been an improvement. There was a road map as well.
But didn't expect FY 2020 and FY 2021 to end the way it has ended. So to that extent, I think there has been a setback, but we are not going to lose focus on that. I think if you're able to do couple of things, one, unlock from investments which are earning less than cost of capital, and these are essentially the infrastructure assets, the concession assets that we own, sell the power equipment business, find some sustainable solution for Hyderabad Metro concession, minimizing the loss by itself is a big lever for ROE improvement. On top of it, we are growing in our core business and we are growing in our services business. So I think if these plans we stick to and continue to work hard as we have been doing, We want to keep our focus on 18% ROE.
Sure. Thank you, sir.
Thank you, sir. The next question is from the line of Deepika Mundra from JPMorgan. Please go ahead.
Hi, sir. Congratulations on a good quarter, and thanks for the opportunity to ask a question. Sir, firstly, just on your capital allocation, I just want to reconfirm that besides the core business, it seems that there is very limited, you know, capital requirement at the moment. So any thoughts on the company's larger plans or longer term plans on capital allocation between E and C and services businesses both?
See, services business are, other than financial services, are generating cash by themselves. So I don't think the parent needs to allocate any further capital to services business. The last large allocation we did to services business was to acquire Mindtree. And fortunately, that acquisition has played out well. And we are doing well on that capital that we have invested.
We invested when the share price was about $9.80 and it's excess of 2,100 today. So I think to that extent that investment has done well. In our E and C business, the requirement has always been working capital. It never has been large outlay of capital. Of course, we have to buy some strategic equipments whenever we get large projects, but that is okay because those equipments are the cost of those equipments are most often amortized over the period of the project as well.
So I think that is not going to be a major drainer. Financial services, we had allocated INR 2,000 crores last year to participate in the rights issue to maintain our shareholding. We do believe for the next few years, the capital that we have infused and the headroom that they have for growth should suffice. I don't expect any significant capital allocation for financial services business in the next couple of years. As far as Hyderabad Metro, it's work in progress.
We allocated about INR1000 crores last year. I do think up to about INR2000 crores, we need to set aside for solving some of the debt equity problems of Hyderabad Metro. The debt that has been contracted in that business was based on $7.08 lakhs of people traveling every day. It's a far smaller fraction as compared to that target number. So it cannot, at the current ridership or even projected improved ridership, sustain the debt levels currently.
So we need to, a, refinance the debt to push the liability back b, is convert some portion of debt into equity or preferential equity. And third, we also need to get some additional equity investors. All of these are work in progress. Now other than maybe INR 2,000 odd crores, I don't see Hyderabad Metro suck in more money for the FY 2022. And in that asset, we'll have to take a call year on year depending on how far we are progressing on the several fronts that we are working on.
So to my mind, much of the cash accruals and of course, we are trying to unlock from our development assets, etcetera, hopefully that will generate some cash flow as well. So to my mind, there has not been big consumption plan for the cash that we are likely to generate in the following year.
So my second question, please, would be in the international business. It seems like a pretty strong pipeline for hydrocarbons. So I just wanted to gauge what is the margin profile now for international orders given current commodity prices? And just overall on both domestic and international, is there a potential tilt towards more variable contracts coming in given the volatility again in commodity prices?
It is largely dictated by the client because in some of the bids, the condition is fixed price. But there are as I told you, 60% of the cases, there are also pass through variation clauses, etcetera, to mitigate the commodity price hikes. The margin profile for EPC businesses have been around 8%, 9%. And international depending on the cost of resources that we use there because many of the international markets are also insisting on using the local resources which are more expensive and maybe on occasions thus less productive. So the margins on the international businesses are more like 7% thereabout, whereas in domestic, they're around 9%.
So we're still able to manage somewhere around in between that depending on the international domestic mix for our EPC business. But the manufacturing business, which feeds into the EPC business, obviously, are better margin businesses. And we've been trying to register growth in that business as well. And that's a function of opportunities that we have, both standalone supplies as well as feeding into our EPC. So I think with the mix of service business, which is high margin, manufacturing business, which is better margin and EPC, is on the pecking order, low margin, but extremely large volume, I think we should be able to maintain this band of blended margin of 10%, 10.5% that we have been reporting.
Thank you. The next question is from the line of Ajinkya Bhatt from Macquarie Capital. Please go ahead.
Hi sir, good morning. Thanks for the opportunity. So just one question from my side. So regarding your private sector order book and inquiry pipeline, could you just throw some light on which sectors are dominating this pipeline? Is it residential real estate, IT campuses, know, within your buildings and factories or industrial facilities across which sectors?
And a related question being, since you mentioned that you expect the private corporate balance sheet to deliver over the course of next two to three years, what is the typical lag between a private CapEx inquiry coming in and order finalization? Basically, I'm trying to gauge what when would we get the earliest indications of abroad or large scale manufacturing CapEx survival in the country? That's it from my side. Thank you.
Let me answer the second question first. First, I'll refresh my mind on what the question was. It is a long question. As far as the cycle for industrial orders, they're far shorter because it's very critical for them that the time to market is crashed. And hence, typically, find eighteen, twenty four months cycle for many of these industry orders.
So the time and opportunity to scale up market presence and the decision to go ahead and award is far lower as compared to a scenario where public sector or government
is
involved. I would think a private sector between the in principle decision and really ordering out should be possible in about four months' time or thereabout, whereas in government, it can be anywhere between six and nine months' time. What is the first question?
Basically, in your current private order book and inquiry pipeline, which sectors are dominating? Is it a residential, real estate, IT campuses or industrial CapEx? If industrial, then which sectors remains steel, food and beverages, pharma, like, you know, heavy industries and supply industries, etcetera?
It's pretty spread. It's pretty spread. There are some opportunities for select apartment residential buildings. There are opportunities for data centers. There are opportunities for logistics parks.
We've not yet seen the textile park that the minister announced in February. And there are opportunities for brownfield expansion of some of the capacity. So I think it is outside of water and power transmission and heavy civil, which are large infra projects. There are scattered opportunities. I think it's very specific to a project.
We can't say residential projects are out out. It's never the case. I think they are still the others have launched in the last quarter residential project in Kartkopur. So I think it's very project specific opportunity. So I think given our size of operations and the breadth of operations, we find fairly uniform and scattered opportunities.
Okay. And has the inquiry pipeline been going up especially after the, you know, announcement of TLI schemes and related incentives, do you see any material pickup there in inquiries?
Nothing specific to PLI, but the sentiment of the country changed from post Diwali FY 20. People were thirsting to get back to action. So to that extent, I think the inquiries, the bidding that we did, etcetera, is reflective of that sentiment. The sentiment has received a setback in April. I think the number of deaths that have happened in the country has been disturbing.
So it is fair to say that sentiment has got disturbed. But we hope that sooner than later we get out of this difficult situation. But the country has taken very little time to bounce back in terms of mood change. And I think that's a positive for me. And if the country can just afford to forget the difficult period that has gone by and focus on what needs to be done ahead and they continue to sustain that as what we saw last year, I think we should be able to see revival.
Okay. Understood. Thanks a lot, sir, and all the best.
Thank you.
Thank you. Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to mister P Ramakrishnan for closing comments.
Thank you, Margaret, and thanks to all of you for participating in this call. Stay safe, and wishing you all the best. Thank you.
Thank you. On behalf of Larsen and Toubro Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your line.