Ladies and gentlemen, good day and welcome to the Larsen & Toubro Limited Q3 FY 2020 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Arnob Mondal. Thank you, and over to you, sir.
Good evening, everybody. A very warm welcome to our Q3 FY 2020 earnings call. The format, as usual, will be that we will first walk you through a presentation, and hopefully, all of you would have downloaded the presentation. It was uploaded on our website just about an hour ago. After the presentation is over, we'll open the session to question and answer. Today I have my colleague, Mr. Harish Barai, who's part of our IR team, who will walk you through the presentation, and then he'll hand it over to me right at the end. Harish, over to you.
Yeah. Good evening, ladies and gentlemen. A very warm welcome to all of you into the Q3 FY 2020 earnings call. I will move on to slide number 2, which is disclaimer. Essentially, this presentation contains certain forward-looking statements concerning L&T's future business prospects and business profitability, which are subject to a number of risks and uncertainties, and the actual results could materially differ from those in such forward-looking statements. The remaining portion of the statement, I will take it as read and move on to the next slide, which is slide number 4. The performance highlights for Q3 FY 2020. For quarter 3 FY 2020, our order inflow recorded a growth of 2% over the corresponding quarter of the previous year. Our order book at INR 3.06 trillion as on 31st December 2019 is up 9%.
Our revenue for Q3 FY 2020 is up 6% over the corresponding quarter of the previous year, and our EBITDA and PAT for the quarter is up 10% and 15% respectively. A couple of comments here. These numbers have to be seen in the context of the current domestic macroeconomic environment. It is important to note that despite strong macro headwinds, we have posted growth on all parameters. Despite deferrals in domestic awards in Q3, we have managed to grow our order inflows by 2%, largely led by growth in international orders. In fact, 43% of our Q3 order inflow is international. Some comments on revenue. Despite carrying a large order book, we consciously slowed down execution to prevent working capital levels from rising further. Payments from the public space has not been very encouraging in Q3.
Secondly, execution challenges arising out of non-moving jobs, mainly in AP and Coastal Road, has also impacted our revenues for Q3. With these comments, I will move on to my next slide on key financial indicators, which is slide number five. On slide number five, quarterly numbers are mentioned on the left portion of the slide, and the nine-month numbers are on your right. Since we have covered the quarterly numbers in the previous slide, in this slide, I will cover the nine-month numbers only. Our order inflow for nine-month FY 2020 is INR 1,286 billion, up 11%. If you splice the nine-month order inflow into quarters, you will realize that our Q1 order inflow growth was largely domestic, whereas our Q2 and Q3 order inflow growth is largely international.
I also want to mention here that in the previous year, we had large orders like Expressway, Dhaka Metro, and Coastal Road. Moving on to revenues. Despite the domestic payment challenges and the fact that 5% of our order book was not moving during the nine-month period, we still achieved 9M FY 2020 revenue growth of 10% at INR 1,012 billion.
Our EBITDA and PAT for 9M FY 2020 grows at 12% and 16% respectively. Coming to working capital. Our net working capital levels at 23.5 in Q3 FY 2020 has largely remained at the same levels as Q2 FY 2020 and Q1 FY 2020. There has been no sequential worsening in working capital levels despite the payment challenges that I just mentioned. Our return on net worth on a trailing 12-month basis stood at 15.7%. All efforts are being put to achieve our ROE goal of 18% by FY 2021.
With this, we will move on to our next slide, which is slide number seven. Q3 9M FY 2020 order inflow, order book. Again, order inflow numbers are on your left, and order book numbers are on your right. Growth in order inflow in Q3 and nine month is largely driven by international business. In fact, you would observe that 43% of Q3 order inflows and 34% of 9M order inflow in the current financial year is international. Domestic prospects have witnessed deferral in award decisions in Q3. Having said that, let me mention here that domestic project pipeline for Q4 is encouraging in a subdued environment. Our bottoms-up domestic project pipeline for Q4 is around INR 2.5 trillion. Coming to order book, yes, a strong order book provides a good hedge against cyclicality.
You will observe from the numbers that our international order book, as a percentage of total order book, has moved up from 20% in nine months FY 2019 to 24% in nine months FY 2020. Today, we have six business verticals where order book ranges between 10%-16% of the overall order book. They are transportation infra, heavy civil infra, power transmission and distribution, water, buildings and factories, and hydrocarbons. Diversity of the order book helps. Future revenue growth is not dependent on the fortunes of any single vertical. With those comments, I will move on to slide number eight, which is group performance, sales, and costs. In this slide, I will mainly be explaining the Q3 numbers, as nine-month numbers are essentially a derivation. Our Q3 revenues at INR 362.4 billion, up 6%, is driven by hydrocarbon and ITTS businesses.
Our manufacturing, construction, and operating expense, or MCO, at INR 218.5 billion in Q3 is down 3%, reflecting cost savings in businesses. Finance charge OPEX for Q3 FY 2020 at INR 20 billion is up 1%. Finance charge OPEX largely represents borrowing cost of the financial services business. Our staff cost at INR 61.3 billion in Q3 FY 2020, up 38%, is largely reflective of Mindtree consolidation and resource augmentation in our service businesses. Salary cost of over 21,000 minds of Mindtree is included in Q3, which largely explains the variation over the previous year. Total increase in staff cost in Q3 over the previous year is INR 16.8 billion, of which INR 12.5 billion pertains to Mindtree. Coming to sales and administration. Our sales and administration expenses at INR 21.4 billion for Q3, up 40% over the previous year, largely on account of Mindtree consolidation and credit provisions.
Consequently, our total OpEx at INR 321.3 billion for Q3 FY 2020 is up 5% over the previous year. With those comments, I will move on to the next slide, group performance, profit stack. Our EBITDA for Q3 FY 2020 at INR 41.2 billion is up 10%. Our finance cost at INR 7.1 billion for Q3 FY 2020 is up 33%. This is largely commensurate with group debt levels reflective of the scale of operations as well as the phased commencement of Hyderabad Metro.
Our borrowing cost at the parent level is around 7.5%, which is one of the lowest amongst corporates. Our parent company enjoys the highest credit rating in India. Coming to depreciation. Our depreciation at INR 6.6 billion, up 63% in Q3, partly on account of Mindtree consolidation as well as depreciation on ROU assets, which have been capitalized after implementation of Ind AS 116 from 1st April 2019.
Other income at INR 4.7 billion, down 19% in Q3, is reflective of lower short-term investments. Tax expense at INR 7.1 billion, down 37%, largely because of the lower tax rate announced by the government in Q2 of FY 2020. JV & Associate share largely reflects IDPL assets, forgings, and power JVs performance. NCI change in Q3 is mainly on account of Mindtree consolidation. E&A business, which has been classified as discontinued operations, reports PAT of INR 1.9 billion for Q3 FY 2020. Our reported PAT is INR 23.5 billion in Q3, up 15% YOY. Moving on to the next slide, which is slide 11, on segment composition. This slide on segment composition is essentially for reference purpose. E&A segment has already been classified as discontinued operations and consolidated at a PAT level. Information technology mentioned within the ITTS segment includes Mindtree as well.
Moving on to the next slide, which is slide number 12 on 9 months FY 2020 order inflow composition. This slide is again for reference purposes. As you can see, 48% of our order inflow in 9 months FY 2020 is from infrastructure. If you would recollect, in H1 FY 2020, our infrastructure orders as a percentage of total order inflows was 38%, essentially means that our Q3 FY 2020 order inflows have largely been powered by infra.
Moving on to the split between domestic and international, 66% of our 9 months FY 2020 order inflows is domestic. If you would recall, in H1 FY 2020, our domestic orders as a percentage of total order inflows was 70%, essentially means that our Q3 order inflows have largely been powered by international orders. With those comments, I will move on to the next slide, which is slide number 13, 9M FY 2020 order book composition.
As you can see, 88% of our order book of INR 3.06 trillion is dominated by infrastructure and hydrocarbon. Within infrastructure, again, our order book is very well diversified across five large sub-verticals, be it water, buildings and factories, heavy civil infra, transportation infra, and power transmission distribution. Therefore, 76% of the total order book is India-based. Over the last couple of years, we have tried to consciously move away from the Middle East. These efforts have borne fruit. About 46% of our international order book is non-Middle East. With those comments, I will move on to slide number 14. 9M FY 2020 revenue composition. This slide is again for reference purpose. There are no major observations in this slide, except that 47% and 30% of our revenues in 9-month FY 2020 is from infra and service businesses respectively.
Secondly, 66% of our 9M FY 2020 revenues is domestic. Within international, for 9M FY 2020, about 41% of our revenues is Middle East. We move on to slide number 15 on the Infrastructure segment. Infrastructure segment, as you are aware, is the largest segment within the group. Obviously the financial fortunes of this segment significantly impacts the group performance. Quick comment on order inflows before we move on to other parameters. After a muted Q1 and Q2, in Q3, we have registered significant increase in infra order inflows, largely driven by international orders. 41% of total infra order inflows in Q3 FY 2020 was international. Domestic ordering environment in Q3 was lackluster, we have witnessed multiple deferment of orders. Having said that, we are optimistic on the domestic ordering environment in Q4 FY 2020.
We see total bottoms-up domestic infra prospects of INR 2.5 trillion in Q4 FY 2020, which should augur well for infra. Moving on to revenues. Muted revenues in Q3 is arising out of execution challenges and the need to preserve working capital levels in a constrained payment environment. Coming to margins, Q3 FY 2020 infra margins at 6.1%, up 70 basis points over the previous year, and 9M FY 2020 infra margins at 6.5%, up 20 basis points over the previous year, largely reflective of stage of execution and job mix. With those comments, I will move on to slide number 16, which is on the power segment. Quick comment on order inflows before I move on to other parameters. Strong order inflow in the current year replenishes the order book and provides a very healthy revenue visibility for the coming quarters.
Coming to revenues, Q3 FY 2020 revenues at INR 6.9 billion, down 23% over the previous year, largely reflective of depleted opening order book and tapering of international jobs. Margins for Q3 FY 2020 is 3.4%, up 50 basis points over the previous year, whereas margins for 9M FY 2020 at 3.6% is down 80 basis points. Margins are reflective of job mix and stage of execution. For the power business, margins appear optically low because MHPS boiler and turbine and other power JV companies are consolidated at a PAT level under the equity method. With those comments, I will move on to my next segment, which is heavy engineering segment. Quick comment on order inflows again before we move on to other financial parameters. This segment had robust order inflows in the previous financial year. Current year FY 2020 order inflows have been impacted by multiple award deferments.
However, that again would be to some extent dependent upon the economic cycles of the global oil and gas industry. Revenue growth of 20% at INR 7.2 billion in Q3 FY 2020 is largely a reflection of the opening order book. Margins in Q3 FY 2020 at 23.5%, up 300 basis points over the previous year. This business yields strong margins in excess of 20% because heavy manufacturing business is essentially capital intensive. EBITDA margins tend to be higher to cover for depreciation and interest costs as well. Apart from that, the global competence, technology differentiation, proven track record and cost efficiencies yield strong margins for this business. We'll move on to our next segment, which is the Defence Engineering segment. Government has been articulating the need to involve the private sector in Defence for a long time. Little progress seems to have happened on the ground.
Consequently, large order inflows are missing and order inflows in the current financial year comprise of multiple small value orders. Execution of tracked artillery gun order continues to drive revenue growth and margins for this business. Margins again reflect stage of execution, job mix, and operational efficiencies. We'll move on to slide number 19, hydrocarbon segment. Hydrocarbon segment has been doing very well, today there is unexecuted order book of close to three years of revenue.
Hydrocarbon business had significant order wins in the current financial year, both from domestic and international market. Strong revenue growth of 17% in Q3 FY 2020 at INR 43.9 billion is the consequence of large opening order book and better progress in the onshore and the offshore jobs. Q3 FY 2020 margins at 12.1%, up 390 basis points over the previous year, largely on account of efficient execution, job mix, and cost savings in certain jobs.
One needs to note that this business runs on low capital employed and consequently generates abnormally high ROCE. We'll move on to our next segment, which is the development project segment. Development projects comprise of power development business and Hyderabad Metro. In the previous year, this segment included Kattupalli Port as well. You would recollect that we sold off Kattupalli Port last year. As you can see, the Q3 revenue of this segment at INR 12.4 billion, up 4%, is largely contributed by power development business. Power development revenues comprise of Nabha Power, which is a 1,400 MW power plant in Punjab. As far as Hyderabad Metro is concerned, we have already commissioned 57 km. The remaining portion should get completed in Q4 FY 2020.
Margin profile of this business segment is still emerging primarily because the final outcomes will depend on various claims that we have filed in respect of Metro and Nabha Power. We will be able to guide you better in the coming quarters on margins. Here again, roads and transmission line are consolidated at a PAT level under the equity method. Moving on to the next slide, which is the IT and technology services segment. Revenues of IT and technology services segment for Q3 FY 2020 at INR 60.9 billion is up 65% over the previous year, primarily because of Mindtree consolidation from Q2 FY 2020 onwards. However, it is important to note that all the three listed subsidiaries have posted healthy Q3 revenue growth in an otherwise seasonally weak quarter. LTI revenue growth is led by manufacturing, energy and utilities, and CPG, retail, and pharma.
LTTS revenue growth is led by medical devices, plant engineering, and transportation verticals. Mindtree revenue growth is led by high tech and media and travel and hospitality. Margin variation is an outcome of increased resource cost, which is an industry-wide phenomenon, primarily because of the pressure of localization in developed countries, particularly U.S.A. Jump in visa costs also contributed to margin variation. However, it is important to note that Q-on-Q margin profile of all these three companies reflects an encouraging trend. With those comments, I will move on to my next slide, which is the other segment. Other segment comprises of construction and mining equipment, rubber processing machinery, industrial valves, and realty business. Q3 FY 2020 revenues of this other segment at INR 12.5 billion registered degrowth of 22%, primarily because previous year revenue included a lumpy sale of commercial premises in our realty business.
Higher previous year margins is also due to the sale. In realty business, let me mention here that we have seen improved traction in sales of reasonably priced residential apartments. Coming to other businesses, our construction and mining equipment, rubber processing machinery, and industrial valves have registered quarterly revenue growth rates of 1%, 27%, and 74% respectively over the corresponding quarter of the previous year. With those comments, I will move on to the next slide, which is on L&T Finance Holdings Group. L&T Finance Holdings, again, a listed company, and they had their earnings call as well. All the numbers in detail are available in public domain. Our company has demonstrated tremendous resilience despite challenges facing the NBFC space.
Company enjoys the highest credit rating in India and continues to focus on various initiatives, starting from prudent and smart lending to focus on asset quality, generating robust NIMs and fees income, maintaining prudent ALM, diversifying the fund sources, and retailization of loan book over time. In fact, retailization of both the loan and the borrowing book over time. Without going into numbers mentioned above, let me mention here that 9M FY 2020 PAT degrowth of 26% is mainly on account of one-time impact arising out of DTA restatement, post opting for a lower tax rate in the new regime. I will move on to the next slide, which is the electrical and automation segment. As mentioned earlier, E&A business has been classified as discontinued operations in FY 2019-2020. PAT of E&A business is being aggregated as a separate line item in our profit and loss statement.
Revenue for Q3 FY 2020 at INR 13.3 billion, down 10% over the previous year, largely reflective of the soft demand environment. Better margins in Q3 FY 2020 over Q3 FY 2019 is largely reflective of the operational efficiencies and other cost optimization measures. We will move on to our next slide on environment and outlook. I will request my senior colleague, Mr. Arnob Mondal, to run you through the same, post which we open up for Q&A. Thank you.
Thank you, Harish. Harish has already covered a fair bit of ground as far as the environment is concerned, but I'll still touch upon a few points in the build-up to giving you some idea of how we see things panning out in the remaining quarter of the year. The environment is no doubt difficult, and we are in the midst of a slowdown. We feel that our economic moat with strong balance sheet, large order book, diverse business portfolio, capability, execution track record, still provides an economic moat for us, which enables us to ride out short-term economic cycles. As far as the lifeblood of our project business is concerned, which is ordering, it is still a bit volatile in terms of timing. It's uncertain in terms of timing. The prospect base is still fairly decent.
Ordering today is still largely public sector-driven because the private sector is still very muted. As Harish said, we have seen it largely being driven by international for the first nine months. We've had a bit of a mixed quarter. We've won some awards, we've lost some awards, but that's part and parcel of our business model, which happens every year, and there's nothing much different. Considering that the prospect base is still decent and assuming that not much deferral of award decisions takes place because many of our customers usually tend to order out, they complete their budgets in the end of the year. We expect to be in the band of 10%-12% ordering growth as originally guided to markets. Coming to revenues.
Q3 has been a bit of a watershed and difficult quarter where we had to balance political, economic, and execution environment headwinds, along with sluggish payment scenario at times from clients. We felt the need to preserve our balance sheet health and not working capital levels balloon to unacceptable levels. We were also significantly affected by AP embargo on project execution since sometime in Q1 of this financial year. I think everybody knows that the Mumbai Coastal Road, which was a large project, was also stopped by a high court order. Execution was stopped by a high court order since early April of this year. The whole of nine months is something where we have lost revenues. We've also seen stoppage of all construction activity in the National Capital Region during the better part of Q3 due to high pollution levels.
All these three together have also impacted our revenues. Our domestic infra segment has been at the receiving end of all these forces. They've had to pull back on execution, and consequently, the infra segment has registered a degrowth in revenues in Q3. The current status is the coastal road has again commenced in full swing, so Q4 should see better traction on that front. The AP, Andhra Pradesh issue is getting resolved, and we think that some revenues should start accruing sometime in Q4 as well. Of course, NCR region embargo is no longer there. It would also not be out of place to mention that a large number of projects faced some execution impediments, such as I already mentioned, the political headwinds. There are also some cases where there was paucity of funds.
There were some delayed client clearances, which could be linked to paucity of funds. Of course, in a few cases, work front availability was stuck. Be that as it may, we are still committed to preserving the quality of our balance sheet. Coupled with the normal trends of urgency by clients to utilize cash flow budgets by the end of Q4, we expect Q4 to be a better quarter on the execution front. The concerns and pullbacks in areas of AP, Maharashtra, NCR region have also receded, and hence we estimate that we will end the year within the band of 12%-15% growth in revenues, as was originally guided by us in the beginning of this fiscal. Margins. We had guided for stable margins for our businesses, excluding services business, and margins in almost all businesses have shown a very welcome buoyancy.
To some extent, tapering of FY 2019, some losses on transportation infra has also been responsible. However, last year, Q3, we had a lumpy EBITDA gain in excess of INR 550 crore from a sale of commercial property, and we're happy to note that in spite of such a lumpy gain not having materialized in the current quarter, Q3, our EBITDA margins have still inched up a bit. Considering the expected Q4 seasonality in job mix, we again expect to end the year within our guidance of stable margins for our ex-services business. With that, I'd like to hand the session over to question and answer.
Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may please press star, then one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star, then two. Participants are requested to use handsets while asking a question. Anyone who wishes to ask questions, please press star, then one. The first question is from the line of Mohit Kumar from IDFC Securities. Please go ahead.
Yeah. Good evening, sir.
Good evening, Mohit.
Congratulations on good order inflow. My question primarily is the guidance to maintain for the order inflow. Given the fact that the Q4, Q3, there were a lot of deferrals, how confident you are of maintaining this order inflow, meeting this order inflow guidance at the lower end? Secondly, sir, can you just comment on the international order pipeline which we are targeting?
The prospect base is still fairly decent. It's something close to INR 3 lakh crores , Harish also mentioned that around INR 250,000 crores approximately is domestic, and around close to INR 50,000 crores is international, largely centered around power transmission distribution, some water projects, some transportation infra, and hydrocarbon. That's international, t hese are the areas that we are typically targeting.
Considering the fact that our ask for Q4 to meet the lower end of the guidance is slightly less than INR 60,000 crores, of which close to, you can say around INR 50,000 crores, INR 45,000 crores would be the ask for our project business. On a prospect base of close to INR 3 lakh crores , it seems reasonably achievable, assuming that the prospects that we see today get converted to awards during the course of this quarter and don't get repeatedly deferred. As I mentioned earlier, typically clients are in a hurry.
Usually, we have seen that in Q4 clients do tend to order out, especially to meet their budgeted commitments. That gives us some element of confidence in being able to achieve our guided order inflow.
Sir, are there any large orders which you are targeting, which is a very large component of the domestic order basket?
Only two coal-fired power plants are there. Apart from that, nothing very much. All the others are relatively small. There are no really blockbuster orders that we are targeting as such.
How is?
If we are lucky, one package of the high-speed rail could get ordered out, but that would be touch and go.
Has the working capital stress reduced in the Q3 compared to Q2, compared to the end of H2? How do you see it panning out in the rest of the year?
No, it has remained in the 23%-23.5% sales level. However, I also mentioned that usually we find that Q4 is a decent quarter in the sense that customers tend to pay so fast to exhaust their payment commitments as far as their budgets are concerned. At the same time, that enables us to ramp up execution without receivables ballooning. When I say ramp up execution, it means that we procure more material, we hire larger labor force, we hire plant and machinery, and expend inputs on our projects. All of those, typically, we get some credit from vendors, so vendor credit also tends to increase.
Working capital levels tend to go down in Q4, but to some extent, that will also depend upon whether customers keep on paying fairly strongly in the last quarter of the year as they have been doing every year in the last quarter.
The last question on the Hyderabad Metro. I believe that this is the quarter where you'll complete and commission the entire Hyderabad Metro. Given the fact that we have taken approval for monetization of 1.2 million square feet, is it possible to share what is the progress on the monetization front?
We have not really envisaged any monetization just now as such. It's always on our radar, of course. The fact is that we are more focused on operationalizing the metro, after which we will look at TOD. You may be aware that this project has 18.5 million sq ft of Transit-Oriented Development to be had. We have barely touched the tip of the iceberg as far as that is concerned, primarily because we have been focused on operationalizing the metro. Let us operationalize that. We look to see whether we can ramp up the TOD part of it.
Thank you.
Thank you.
Best of luck for the Q4. Thank you.
Thank you. The next question is from the line of Venugopal Garre from Bernstein. Please go ahead.
Hi.
Hi, Venugopal.
Congratulations, I would say. Congrats a lot, especially given the fact that orders were good and the guidance seems to be pretty much intact. I just wanted to probe a couple of things on that. Number one is the deferment of orders that you highlighted in Q3 especially. Was there a common element to it? Was there a common driver that you would have seen for the deferment for those orders? Is it largely paucity of funds which was driving that, or was it little activity from the government in getting those approvals for these projects? What is it that was the major driver for order deferment?
Usually, clients don't tell you exactly why they are deferring it. You just have to wait and watch. Venu, I'm sorry, I'll not be able to give you any more granular color on this aspect of the deferment. It's something that we have seen happening, particularly in this quarter.
Okay. Two other small things. Maharashtra, excluding the coastal order which you mentioned, was there anything which was stalled post the change of government there, or this was the only order which was sort of? This order had some other issue.
Yeah. We have been doing some very large marquee orders, and actually, we practically slowed down significantly for around a month till better clarity emerged, because the initial statements that emanated from the new government were not very encouraging. However, they quickly toned down the rhetoric. While, yes, we did miss some revenues, but it was not for a very prolonged period of time. It quickly returned back to normal.
Got it. My last question is, this news flow on Nabha, which was a bit confusing, with regards to FGD implementation not having been done. The new project was not then generating power, and then there was some issue on the notice from the Punjab Power, and then it restarted again. What is the challenge there as of now in terms of status? Is it something that we should track?
The challenge was that we had represented for extension of time to multiple authorities. In fact, Ministry of Power had also recommended our case. Punjab Pollution Control Board had also endorsed a recommendation for extension of time. Unfortunately, the Central Pollution Control Board did not take any action, and the deadline was 31st of December. To actually make a point, we shut down our plants on 31st of December. Again, based upon advice from regulatory authorities, we again restarted within a few days. Expecting that, yes, we should get some extension of time for this.
Okay. The implementation is going on, the FGD one.
Yes.
Okay.
Implementation is going on.
Thank you. Thanks a lot.
Thank you, Venugopal.
Thank you. The next question is from the line of Abhishek Puri from Axis Capital. Please go ahead.
Yeah. Hi, Arnob. Congratulations on good set of performance in the challenging market.
Thank you.
My two questions here, first, I think you mentioned in the press release that there is some variation claim settled in the infra and hydrocarbon segment. How big would they be? Could you spell that out?
Actually, we don't specifically talk about thing, but in Q2, hydrocarbon, we did get a very large claim of around INR 70 crore-INR 80 crore in Q2.
Right. In Q3 also, is there an amount? It's mentioned as per the quarter, I think, in the statement.
We also got some claims.
Okay. Would it be something similar? Last time it was about INR 70 crores, if I remember correctly.
No, I think we'll take that question offline.
Okay. Right.
Yeah.
Second, in terms of working capital, how is the mix now? I think last time when we discussed on this, the receivables were down, and the working capital deterioration was only due to the vendor support that you had given. How is the mix in Q3 now?
It's still the same. In fact, receivables along with retention together is down maybe by a few hundred crores or so in absolute terms. Payables are still not moved up. The mix is pretty much the same.
Okay. The liquidity situation has not really helped or improved?
No, not really.
At a level, specifically.
If you track credit growth, you'll see that credit growth has been tapering downward.
Right. Okay. Lastly, sir, the projects in Andhra, you did mention that some of the revenue could come back in Q4. Can you spell out which projects can come back out of this INR 14,000 crore-INR 15,000 crore order inflow that we have from there? If any settlement has been done.
Actually, sorry to disappoint you, Abhishek, but we don't discuss project-specific details. Suffice to say is that it is getting resolved and it's on the verge of restarting again.
Can we safely say about 50% of this has been resolved, or it'll be more or less than that?
I can't give you number, but a large part of it has been resolved.
Okay, great. That will be helpful. Thanks a lot. All the very best.
Thank you. The next question is from the line of Sumit Kishore from JP Morgan. Please go ahead.
Good evening, sir.
Hi, Sumit.
Hi. The overseas infra order inflow performance was particularly pleasant to know. Could you give us some color on the geography sector and the customer profile of the international orders that you booked in third quarter?
Sumit, since we have not given out specific press releases, in the absence of customer approval, we will not be able to spell out the details as you are asking.
Broadly, these are from which geographies? Is the nature of the project more than INR 30 billion-INR 40 billion of orders?
Africa, Middle East, typically, are the geographies where we are seeing some traction in infra.
These are government contracts?
Sumit, please, I'll have to disappoint you, but whichever way you ask your question, my answer will still have to be the same.
Sure. Very briefly, a follow-up on the previous question. When certain portions in AP are getting resolved, is there an indication towards the Amaravati contracts also? Given we were reading that they're possibly going to have three capitals, a legislative, executive, and judicial capital.
Some part of this may happen. Yes, it's being resolved in a holistic manner, not just a few projects here and there.
Okay. Finally, on Hyderabad Metro, could you please give us the third quarter EBITDA interest, depreciation, and profit for Hyderabad Metro?
On a turnover of around INR 225 crores approximately, we got EBITDA slightly less than INR 100 crores and a negative PAT of around INR 45 crores approximately.
Okay, the interest cost was how much? Because that is a key number.
We'll give you better clarity when we commission the full project sometime in Q4.
Sure. Thank you so much.
Thank you.
Thank you. The next question is from the line of Aditya Bhartia from Investec. Please go ahead.
Hi, good evening, Arnob.
Hi, Aditya.
Arnob, my first question is on the execution pace wherein you experienced optimism around fourth quarter. Given the fiscal scenario of the government and given that allocations to some of the ministries is also getting curtailed, isn't there a risk that some of the trends that we saw in third quarter may persist in fourth quarter as well? Essentially, that unless you are willing to relax working capital terms, execution may remain challenged?
Aditya, that risk is always there, I don't see anything different from what we have seen in earlier years as well. The same question keeps on arising in earlier years as well, that if the government breaches its fiscal deficit, will it pull back payments and hence will your execution get delayed? This is a standard question which you are asked in the beginning of Q4 every year. The risk is always there, but we're hopeful that it won't play out in a full-blown manner.
Okay. In my second question, I just want to get a sense about how important is the operating leverage impact in our business, wherein because our infra revenues have been so weak in this particular quarter, do you think that has also impacted our margins on the infra side? In a sense, margins could have been lot better had some of the orders gotten executed.
Some element of operating leverage does play out, but those typically tend to be more transient. In fact, people keep on asking me that infra, if it keeps on growing, shouldn't you see a significant bump up in margins? The fact is that operating leverage gains tend to be transient because the moment people see increase in margins, the natural tendency of business is to become more competitive in bidding. It tends to peter out after some time. It works both ways.
Especially in this particular quarter, wherein you may have appointed some contractors, you may be having some equipment on lease, some of those contracts did not get executed. Will there be a charge on some of those orders wherein execution has been moving slow?
Aditya, you must appreciate that we can't completely dissect every part of our margin and explain it. In any case, quarterly numbers are usually not reflective of either full year or steady state margins going forward. I suggest you don't go down that path and don't extrapolate quarterly margins into steady state levels.
Sure. Lastly, I just wanted to understand if there's been any traction in the defense sector, and we obviously read about this article on submarines. Anything that's happening over there, and what's your expectation?
See, defense, that is what you read this morning was obviously a very positive development, but that's just one step in the journey towards finally getting it ordered out under the Strategic Partner Program. It's a very long drawn-out process, and I don't expect anything to happen in the short term. It's unlikely that anything will happen immediately. Defense procedures are very lengthy, and we have to go through many procedures which typically are not there in other parts of our business. Timelines can be very elongated on this.
Sir, could this order get placed next year in FY 2021? Do you think it will go down, I mean, FY 2022 or 2023?
Aditya, I'd not care to even speculate on that, please.
Okay, understood. Perfect, sir. Thanks.
Thank you.
Thank you. The next question is from the line of Amish Shah from Centrum Broking. Please go ahead.
Yeah. Hi, Arnob.
Hi, Amish.
Sir, you mentioned about some possibility of HSR one package coming within Q4. That's a little surprising given the stand that the new government has taken in Maharashtra. Anything you could elaborate on that?
No, it's just that the bid submission and steps like that are progressing a bit. It's not come to a complete standstill.
Okay. You're saying that process still goes on?
That process is going on. Whether it'll actually get ordered out and timelines of that are still a bit uncertain.
Sure. Fine. Sir, in the cash flow, we see a net investment or purchase of investment about INR 1,140 crore. That would be towards the metro, Hyderabad Metro, or there's some other investment that we made?
Hyderabad Metro would come under. It's mainly on financial services business.
Okay. That's from the financial services.
Hyderabad Metro investment, it will fall under investment because it's 100% subsidiary of L&T and hence there's a line-by-line consolidation. The CapEx gets consolidated under investment in fixed assets.
Sure. It wouldn't reflect here, actually. Right. This INR 1,140 crores that we see here is on the financing business.
It will largely that.
Okay. Fine. Maybe I'll take it offline. Also, any impact of forex mark-to-market loss or gain during the quarter?
During the quarter, some impact is there. In the quarter, there is bit of a variation between the Q3 of this year and Q3 of last year. As far as forex is concerned, we've had a gain of around INR 100 crore this year against a gain of around INR 30 crore last year, in this quarter.
Okay. Q3 has a gain of about INR 100 crores.
Yeah.
Okay. Sure. That would be part of the other expenses. I mean, the expenses would be lower to that extent.
Yeah. Sales and admin expenses.
Sales and admin expenses. Sure. Thank you very much, sir.
Thanks.
Thank you. The next question is from the line of Girish Achhipalia from Morgan Stanley. Please go ahead.
Sir, thanks for the opportunity.
Hi, Girish.
Just the three states that you mentioned and now those issues are receding. Had these issues not commenced in Q3, any ballpark number, how much revenue would you have lost because of these different situations panning out in different states?
As far as these three issues are concerned, we have lost around INR two and a half thousand crores - INR 3,000 crores of revenue in Q3.
Okay. Sir, just in terms of the process, not the timeline or anything, for the Defence Strategic Partnership Program, because there are two vendors, which is yourself and Mazagon Dock, which the media is quoting now. The steps now would be that you would partner with the foreign collaborator and then one of the two would finally be given the bid contract. How would you flow through now from here on?
I'll get back to you on that, but suffice to say that I would suggest you don't assume anything happening in a hurry.
Sure.
I'll have to get back to you.
I just want to understand the process. Okay. The final thing is, sir, if I look at the concession slide, you updated the balance equity or commitments across IDPL/VGF at INR 12 billion, which I presume in the last quarter was about INR 6 billion. This incremental money, is that for Hyderabad Metro or certain specific projects?
It is for Hyderabad Metro.
Okay. Perfect, sir. Thank you so much.
Thank you.
Thank you. The next question is from the line of Puneet Gulati from HSBC. Please go ahead.
Good evening. Hi, Arnob.
Hi, Puneet.
Just if you can give a little more color on the payment outstanding side. Are you seeing these deferred payments more from government departments, PSUs, or from private entities as well?
No. See, private sector now is less than 20% of our total order book. It's 20% of the domestic order book. Obviously, most of the payment stress is coming from public sector.
Public sector enterprises or government department?
Actually, combination of central, state, and PSUs, all three.
Okay.
Slowish payment.
Right. What gives you the confidence that this will come back given that Q4, there are also budget constraints from the central and the state government side?
Puneet, I think somebody else asked this question. I think Mohit Kumar asked this question already. There is no certainty on this, but we have also seen a similar situation happening year after year. In fact, for the last few years, the economy has not been firing on all four cylinders.
Okay.
The same stress has been seen in earlier years, and it seems to get alleviated in Q4.
Okay. Great. Secondly, on the E&A business, any clarity on when L&T will see money?
See that we are having to go through various statutory formalities, including transfer of land and building and novation of a huge number of contracts to the new entity. Those have to be done piece by piece. For example, suppose some customer has given a contract. They've given it to Larsen & Toubro Limited. After this is a contract, we have to tell the customer that the customer has to agree that the remaining part of the contract will be done by some other legal entity. Contract by contract, the novation has to be done for the huge number of contracts. That's what is essentially taking time.
Does it look like the process will get completed in FY 2021, or can it extend beyond that?
No, I don't think it will. Press release we have mentioned that it should get concluded within the next few months. If we're lucky, by the end of this year. If not, hopefully in Q1 in FY 2021.
Okay. We are very, very close.
Yes.
Lastly, in your cash flow, there is a line item for disbursements towards financing activities. It's a positive INR 14.7 billion. What does that relate to?
That was actually a loan book sell-down.
Okay.
ARC.
Okay. ARC. Okay. Great. That's all from my side. Thank you so much.
Thank you, Puneet.
Thank you. The next question is from the line of Atul Tiwari from Citi. Please go ahead.
Sir, my question has been answered. Thank you.
Thank you, Atul.
Thank you. The next question is from the line of Varun Ginodia from Ambit Capital. Please go ahead.
Hi, Arnob. Thanks for the opportunity.
Hi.
Just, I need a quick update on the claims that you have from the Hyderabad government on the metro site. What's the update on that? About INR 3,000 odd crore claims. Secondly, on the sale of Nabha Power, what's the latest update there? Just these two questions.
As far as Hyderabad Metro is concerned, while the issue is still under negotiation, we'd not like to speculate on what the final outcome could be. Hopefully when we commission the full metro, we'll be able to give you some idea then. As far as Nabha Power is concerned, there are a number of cases pending in the Supreme Court, including a contempt petition that we have filed because PSPCL has not paid their dues. There's another dispute on Mega Power Policy benefits that is pending. We'll possibly look to see whether we can get a buyer only after these issues are settled at the Supreme Court level.
Okay. Just one quick question, if I may ask. On the hydrocarbon margins, you have always maintained that 8%-9% may be the most sustainable margin there. For the consecutive second quarter, the margins have come out very nicely. What's the trend there that we can foresee over the coming quarters? What is the sustainable margin there in the hydrocarbon side?
Varun, here again, I'd like to urge you not to take quarterly margins numbers, especially margins, because they tend to become lumpy. One large project crossing a margin recognition threshold would lead to a bump up in margin. One large claim in a quarter could lead to a bump up in margin. It does look as if the margins that they're getting now on a slightly longer term basis, not the quarterly numbers, but nine months, appears to be sustainable, assuming that execution efficiency continues at this level.
Okay. Yeah. Thanks so much.
Thank you.
Thank you. The next question is from the line of Deepak Krishnan from Goldman Sachs. Please go ahead.
Sir, good evening. This is Pulkit.
Pulkit.
Hi, sir. Sir, two questions. Firstly, we heard that there were some large releases from various government department, payment released in the month of December. Anything that you saw in terms of big payments that came in during that particular month?
I would not like to comment on individual projects, and at our level, we can't get absolute granular level details on every project, Pulkit.
No, sir, basically what I'm trying to gauge is that despite a muted quarter on infrastructure execution, fourth quarter, clearly we are not sounding as worried. I'm just seeing that, is the momentum looking a little better than what it was a few months back? That's basically what I'm trying to gauge.
I mentioned three areas where we lost a significant amount of revenue quarter-after-quarter. Andhra Pradesh coastal road, as well as in Delhi in Q4, NCR region. Since those appear to be getting resolved, two are already resolved. AP one is getting resolved. Number one, part of the confidence stems from that. Secondly, the other part stems from the fact that I already mentioned that usually Q4 is a quarter when most of our customers release payments to exhaust their payment commitment budgets. Apart from the fact that there's no artificial or natural seasonality in Q4. All other quarters have some sort of seasonality, either very hot months or monsoons or too many holidays, but Q4 does not have all that.
Fair point. My second question is, now that 50% of our international order book is non-Middle East, particularly the last couple of quarters, we've seen a pretty significant inflow of orders from international. Could you just give some qualitative difference between ordering in Middle East and non-Middle East, either in terms of risk or in terms of profitability? Anything that you can share on that?
One thing I can say is that operation in the Middle East has become a bit more challenging than it was in earlier years, primarily due to localization efforts there. That's one basic difference that is there. You would recollect, Pulkit, that at one point of time, our dependence on Middle East was very high, and that is one of the reasons why we moved into parts of East Africa, North Africa, as well as Southeast Asia countries.
Because these are relatively new geographies, just from a risk perspective, how are we sort of protecting ourselves because these are not primarily great geographies historically. Just wanted to understand that part a little better.
Every project that we bid for goes through a pre-bid risk assessment where all the risks are assessed, and only if all major risks can be mitigated do we bid.
Sure.
To our reckoning, we do a decent due diligence on assessment of risks before putting in a bid for every single project.
Sure, sir. Thank you so much.
Thank you.
Thank you. The next question is from the line of Ajinkya Bhat from Macquarie Capital. Please go ahead.
Hi. Good evening, sir. Thanks for the opportunity.
Hi, Ajinkya.
Sir, my question is, in your comments about margin, you mentioned about tapering of some losses in transportation infra. Could you throw some color on when those loss-making projects are likely to get completed, let's say, would that be in 2 quarters from now, 3 quarters from now? Do you have any internal glide path for infrastructure EBITDA margins to go back towards, say, 9.5% kind of range?
Ajinkya, you would appreciate that we don't give any guidance for individual segments. We give a guidance for all businesses excluding services business, services business, as you are also aware, has a very different margin profile. Yes, transportation infra has a few projects where we did incur losses in FY 2019. When we say incurred losses, we provided for foreseeable losses, that means that the remaining part of the project has to be executed on zero margins. That obviously depresses margins to some extent. Once those are flushed out, you could see a better margin profile.
We'll give you the better color on overall guidance when we declare our results in the month of May, because by that time, we'll have completed our budgeting exercise, and there's a bottom-up assessment of where our next year's margins are likely to land up with, what position it could be.
Any timeline on when those projects might get completed? Is it two quarters worth of execution?
Each project has a different timeline, so I can't talk about individual projects either.
Okay. Sure. Thank you, sir.
Thank you.
Thank you. The next question is from the line of Aditya Mungia from Kotak Institutional Equities. Please go ahead.
Good evening, Arnob.
Hi, Aditya.
Yes. I had a few questions. The first one was on the hydrocarbon segment. As your press release suggests, you have bagged almost nothing in the quarter gone by. Is it reflective of limited bids that one can be making or of heightened competitive intensity in that segment?
Actually, see, Aditya, hydrocarbon is one sector where usually the bid sizes are pretty chunky. Could be anything between $400, $500, $600, $800 million to a billion dollars or so. Obviously, the only place are the Middle East and even in India are some places where investment action is happening. These are very fiercely competed. Every large international hydrocarbon EPC major tends to bid for these. We have lost a number of bids in Q3. We've lost quite a few bids in Q3, and that's the reason why Q3 order inflows are practically close to zero. The fact is that we would prefer to be very disciplined in our bidding rather than get orders at any cost. This business has over 45,000 crores of orders in hand, which is a very healthy situation for this business. We are not desperate to bag orders.
Ordering is happening in hydrocarbon, both internationally and in India.
Just a related question. What do you think are the sustainable margins of this segment? Because the margins have been quite watertight over the past few quarters, and obviously there are some claims inside, but would you suggest that 10% or above can actually be sustained in this segment, or should one be thinking through lower numbers overall?
I think I answered this question earlier. I said that if execution efficiency remains at the same level, then these margins appear to be sustainable.
Got that. The second question was more on the infrastructure pipeline of INR 102 trillion that has been talked about by the government. Just want to get your sense as to whether on ground anything is changing for you to be believing that such large amount of CapEx can actually happen, let's say, issues of cost and time avoidance. To my understanding, nothing has broadly changed, but if you could highlight something different, it would be useful.
See, Aditya, let me put it this way. Even today, around INR 14 lakh crores of spending, I'm not talking about ordering, I'm talking about cash spend. Even today happens year-on-year. If you take central government, for example, this year, the central government budget allocation is INR 3.3 lakh crores. Last year, state government spending was more than INR 6 lakh crores. We assume that it'll come down to around INR 5 lakh crores this year.
PSU CapEx spends are another INR 5 lakh crores. Multilateral funding came in at around INR 70,000 crores. We are talking about INR 14 lakh crores on a regular basis, and this is without considering any nominal GDP growth. This INR 102 lakh crore spend that you're talking about is over a 6 years. If you take on an average INR 15 lakh crores and you multiply by 6, you straightaway get INR 90 lakh crores .
It's not too far from the numbers put out by the government, even though the funding pattern is yet to be established. This sort of spend doesn't seem to be very fanciful as far as number crunching is concerned. If you consider the sort of spends that are happening today, and on a $3 trillion economy, INR 14 lakh crore means $200 billion . That's around 6.5% of the GDP, which is a reasonable assumption, if you ask me. It's not too fanciful.
Got that. Those are the questions from my side. Thank you.
Thank you. The next question is from the line of Ankur Dev from Bank of America. Please go ahead.
Hi, Arnob. This is Amish here.
Hi, Amish.
Arnob, just a couple of questions. First on the 10 toll roads that we have. I believe at some point in time there was some arrangement to put it into an InvIT as well, right? What's the progress on that?
There was no arrangement to put it on an InvIT. Every asset that will go on an InvIT has to go on its own merit. There is no prior understanding as such.
Okay. Do we have anything in the works right now related to those ten projects?
It will obviously be our focus area to see whether we can minimize our exposure to asset ownership in the infrastructure space. We will obviously be examining all possible ways of doing so. Whether that would be further dilution of our equity stake, whether that'll be divestment of assets to an InvIT or any other shape.
Sure. If possible, can you give us some perspective on what's happening on your realty side of the business?
As far as realty is concerned, if you take all the projects that we have launched, we've launched around approximately 5,000 flats. We've handed over around 2,000 flats, for which revenues have been credited to the P&L account. We still have 3,000 flats to be handed over, of which 1,800 flats have been sold and 1,200 flats are yet to be sold. The broad-brush picture. Give or take 10, 12 here and there.
Okay.
Ultimately-
Thank you so much.
The revenues of 3,000 flats are being credited, passed to the P&L over the next few years.
Thank you. Bye.
Thank you.
Thank you. Participants to ask a question, please press star then one. There are no further questions from the participants, I would now like to hand the conference over to Mr. Arnob Mondal for closing comments.
Thank you. Thank you, ladies and gentlemen, for a patient and interactive hearing, and with this we'll close this session. Thank you.
Thank you. Ladies and gentlemen, on behalf of Larsen & Toubro Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.