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    500510   INE018A01030

LARSEN & TOUBRO LIMITED

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Earnings Call Transcript Q2FY22

11/01/2021 | 05:17am EST

"Larsen & Toubro Limited's Q2 FY22 Earnings Conference

Call"

October 27, 2021

MANAGEMENT: MR. P. RAMAKRISHNAN - HEAD, INVESTOR RELATIONS, LARSEN & TOUBRO LIMITED

Page 1 of 22

Larsen & Toubro Limited

October 27, 2021

Moderator:Ladies and gentlemen, good day and welcome to the Larsen & Toubro Limited Q2 FY22 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing '*' then '0' on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. P. Ramakrishnan -- Head, Investor Relations, Larsen & Toubro Limited. Thank you and over to you, sir.

P. Ramakrishnan: Thank you, Faizan. Good evening, Ladies and gentlemen. A very warm welcome to all of you to the Q2 FY22 Earnings Call of L&T. The analyst presentation was uploaded on the stock exchange and our website an hour back. I hope you would have had a chance to take a quick look at the numbers. As usual, instead of going through the entire presentation, I will try to summarize the key highlights for the quarter, followed by our commentary on Environment & Outlook which I believe will take the next 20 or 25 minutes, post that we will get into Q&A.

Before I begin the overview, a brief disclaimer: The presentation which we have uploaded on the stock exchange and in our website today, contains or may contain certain forward-looking statements concerning L&T's business prospects and profitability which are subject to several risks and uncertainties and the actual results could materially differ from those in such forward- looking statements or statements made during this call.

Q2 FY22 can best be described as a comeback quarter for India. Not only did the Covid second wave in India abate faster than expected, but from the various published high frequency economic indicators, it does appear that the dent created to growth by the second wave was shallower than the first. Green shoots were visible in various industry, services, investment and mobility indicators towards the latter half of Q2. In a way, the widening trade deficit in September '21 is also an indicator for a more normalized India. The higher tax collections witnessed in Q2 also reinforces our growth thought process. On the flip side, the supply side inflation challenges continue to remain a source of worry. India completed more than one billion vaccinations and as we speak the daily Covid infections are already at an 8-month low. Going forward, a combination of pent up plus festival demand should augur well for India recovery in Q3 FY22 and beyond.

Coming to our L&T group performance, Q2 FY22 was about striking a balance between "profitable growth" and "capital employed". Let me assure you that the return ratios at a group level are being pursued rigorously irrespective of the macroeconomic volatility.

I will now cover the key financial indicators for Q2 FY22. Our order inflows for Q2 FY22 at Rs 421 billion, registered a growth of 50% over the corresponding quarter of the previous year. In the Projects and Manufacturing business, our order inflows for Q2 FY22 at Rs.301 billion, registered a growth of 73% over Q2 FY21. The order inflows in the Projects and Manufacturing businesses(P&M) are fairly spread out across all the segments that comprise the P&M business, namely Hydrocarbon, Infrastructure, Heavy Engineering, Realty and the Industrial Machinery & Equipment businesses. Having said that let me mention here that in Q2 FY22, we did witness

Page 2 of 22

Larsen & Toubro Limited

October 27, 2021

some delays in domestic awards finalization despite a robust pick up in tendering activity.Just to elaborate on that point further, whereas macro level domestic projects announced and tendering activity in Q2 FY22 was up by 19% over Q2 FY21, projects awarded drop 22% over the comparable quarter of the previous year.

Moving on to our prospects pipeline. In the Projects and Manufacturing business, for H2 FY22, our total prospects pipeline stands at Rs.6.83 trillion as against a total prospect pipeline of Rs.6.13 trillion that existed as of September 2020. This reflects an overall increase of around 12%. This overall prospect pipeline comprises of domestic prospects of Rs.4.66 trillion and international prospects of Rs.2.16 trillion. I am sure you would recall that our total prospect pipeline at the end of Q1 FY22 was around Rs.8.96 trillion. With the Covid second wave behind us and remote risk of a third wave, we do expect a very busy H2 in terms of tendering and awards finalization.

Now moving on to order book. Our order book as on September 30th, 2021 is at a near record high of Rs.3.31 trillion. A large and diversified order book gives us multi-year revenue visibility. As our Projects and Manufacturing business is largely India-centric, 77% of this order book of Rs.3.31 trillion is domestic and the rest 23% is international. Around 89% of our total order book comprises of infrastructure at 74% and hydrocarbon at 15%. Within infrastructure, our order book is well diversified across the various business segments like Heavy Civil, Water, Power Transmission and Distribution, Buildings and Factories, Transportation Infra and the Metallurgical and Material Handling businesses.Further breakdown of the domestic order book is as follows: Central Government 10%, State Government 33%, Public Sector Units of state- owned enterprises at 42% and the remaining Private sector at 15%. Again, around 31% of the total order book is funded through bilateral or multilateral institutions.

Coming to revenues. Our group revenues for the Q2 FY22 was Rs.348 billion, registering a growth of 12% over Q2 FY21. International revenues constituted 35% of the revenues during the quarter. The IT and technology services portfolio did report industry leading growth in Q2. In the Projects and Manufacturing business, our revenues for Q2 FY22 were at Rs.228 billion, registering a growth of 12% over Q2 FY21. The executions in the Projects and Manufacturing business were calibrated in line with the cash flows that we realized during the quarter. Going forward, as cash flows improve in the second half and if there are no major risks emanating from a possible Covid third wave, we should witness improved execution level just like any normalized second half of the year.

Moving on to EBITDA margin. Our group level EBITDA margin for Q2 FY22 at 11.5% vis-à- vis 10.7% in Q2 FY21 reflects an improvement of 80 basis points largely on account of improved overhead recovery despite cost headwinds. It is important to note here that even on a sequential basis, our group level EBITDA margin has improved 70 bps. Kindly refer to the detailed breakup of the EBITDA margin businesswise which is given in the annexures to the analyst presentation.

Coming to Projects and Manufacturing business portfolio, our Q2 FY22 EBITDA margin is at 9.2% vis-à-vis 8.1% in the second quarter of the previous year, again registering an improvement

Page 3 of 22

Larsen & Toubro Limited

October 27, 2021

of 110 basis points. Even sequentially, there is an improvement of 30 basis points. As guided at the beginning of the year, we will maintain our Projects and Manufacturing business EBITDA margin in the current year at the same level as last year, which is around 10.3%. We have multiple levers in the businesses to offset the cost headwinds being experienced in the current year. I will briefly explain that. Our current composition of variable price contracts in the order book should be around 60%-65%, that is one fact that gives as far as cost increases is concerned, a sort of compensatory impact. Secondly, there are jobs that are expected to cross the threshold margin level in the current year. Thirdly, there will be cost contingency releases for the jobs nearing completion. And on top of them, we have overhead optimization initiatives, enhanced productivity through digitization, value engineering and wastage control initiatives, negotiation with vendors and discussions on clients on use of alternate variates of inputs, all these measures see us through in terms of managing the cost pressures experienced in the current year.

Moving on to PAT. Our operational PAT for Q2 FY22 at Rs.17.2 billion, is up by 56% over Q2 FY21. The improved EBITDA due to better overhead recoveries as well as reduced finance cost due to lower borrowing at a parent level, contributes to this PAT improvement. Our reported PAT at Rs.18.2 billion for Q2 FY22 has registered a decline of 67% over Q2 FY21, mainly due to the two one-off items in the last year; one being the gain on the divestment of the Electrical and Automation business and two exceptional items that we took with respect to impairments of our exposure in the Forgings and the Power Development business portfolio.

The group performance P&L construct along with reasons for major variances under the respective function heads is provided in the analyst presentation. The only place I would like to draw your attention is to the exceptionals reported for the current quarter i.e. Q2 FY22. The Rs 1bn billion exceptional net of tax for Q2 represents the gain on divestment of our stake in Uttaranchal hydro power plant which is at Rs 1.44 billion and at a group level a tax outgo on transfer of the next digital business that happened on 1st of July from L&T to Mindtree at Rs 0.47 billion as an outgo.

Coming to working capital. Our group net working capital to sales ratio has improved from 26.7% in September '20 to 22% in September '21. One of the reasons for this ratio moving lower is due to the denominator moving higher. Secondly, as I mentioned earlier, we have tried to maintain a healthy balance between execution and working capital management during Q2. You would have noticed that the NWC to Sales ratio has also improved from the March '21 levels where we had reported 22.3%. Customer collections have been good during the quarter. Our group level collections that exclude the financial services portfolio for Q2 FY22 were at Rs.322 billion vis-à-vis Rs.296 billion in Q2 FY21. If you glance through the cash flow statement given as part of the annexure to the analyst presentation, you will notice that the net cash from operations in Q2 FY22 was at Rs.40.4 billion, vis-à-vis Rs.27.3 billion in Q2 FY21, registering a strong growth of almost 48%. The capex for Q2 FY22 was at Rs.5.7 billion vis-à-vis Rs.3.6 billion in Q2 FY21. As we look at it, we are off to a good start in the first six months. Now hopefully, we should consolidate and sustain this momentum.Finally, as we had mentioned, at the beginning of this year, our endeavor is to maintain our group level net working capital to

Page 4 of 22

Larsen & Toubro Limited

October 27, 2021

sales ratio in March '22 in and around the same levels that we reported for March '21, which was around 22.3%.

Moving to balance sheet. If you glance through the balance sheet given in the annexure to the analyst presentation, you will notice that our group level gross as well as net debt ratios have improved vis-à-vis the March '21 numbers. This is primarily due to repayment of liabilities in our financial services business around Rs.37 billion, power development business around Rs.21 billion and as well as at the L&T parent level around Rs.17 billion.

Finally, our trailing 12-month ROE as on September '21 is at 11.8% vis-à-vis 16.8% printed for September '20. As you are aware, the ROE in September '21 includes the benefit of a one-time gain on the sale of Electrical & Automation business, net off the exceptional write-offs that we took in Q2 of the previous year. Further, you would also recollect that as on March '21, our ROE on the continuing operations is at 10.1. We are improving progressively and as I said earlier, return ratios going forward will be pursued rigorously. A robust business portfolio, focus on cash generation & distribution, eye on capital employed and divestment of the non-core concession assets should hopefully lead to an improvement in ROEs in the near future.

Very briefly, I will now comment on the performance of each of the business segments before we move on to the final comments on the Environment and Outlook.

Coming to infrastructure, order inflows in Q2 are fairly spread out across the various sub- segments. Having said that, let me mention, that Q2 was a quarter of robust new project announcements at a macro level and even tendering activities happened at a brisk pace, however we did witness delays in the awards finalization. Our order prospects pipeline in this segment for H2 for the current year remains healthy at Rs.5.29 trillion vis-à-vis Rs.4.40 trillion same time last year, reflecting an increase of 20%. Of this Rs.5.29 trillion of prospects, domestic prospects are at Rs.4 trillion and international at Rs.1.07 trillion. The prospects are well spread across various areas like buildings and factories, hydel projects and tunnel projects, ports and harbors, metros, nuclear power construction, roads, railways, water, power transmission and distribution and metallurgical and material handling. The order book in this segment is at Rs.2.43 trillion as at September 2021. The average execution cycle of this order book is around 27-28 months. So the book-to-bill ratio is close to around three years. The Q2 revenues at Rs.139.2 billion registered a growth of 7% over the comparable quarter of the previous year. We followed a calibrated execution approach in this segment in line with the cash flows during the quarter. To some extent, we suffered on the execution front due to supply chain bottlenecks overseas largely due to Covid reasons and also intermittent and incessant rains and finally cyclone Tauktae which impacted project execution progress in Maharashtra and Gujarat sites. Our EBITDA margin in this segment improved from 6.4% in Q2 FY21 to 8.3% in Q2 FY22 due to a better job mix and improved overhead recovery despite commodity prices headwinds experienced during the quarter. Even on a sequential basis, that is from Q1 FY22 to Q2 FY22, the margin has improved by 120 basis points, that is from 7.1% to 8.3%.

Page 5 of 22

This is an excerpt of the original content. To continue reading it, access the original document here.

Disclaimer

Larsen & Toubro Limited published this content on 01 November 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 01 November 2021 10:16:08 UTC.


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Net income 2022 96 847 M 1 296 M 1 296 M
Net Debt 2022 1 088 B 14 566 M 14 566 M
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Sekharipuram Narayan Subrahmanyan Chief Executive Officer, MD & Executive Director
Ramamurthi Shankar Raman Chief Financial Officer & Executive Director
Anil Kumar Manibhai Naik Group Non-Executive Chairman
A. Sivaram Nair Secretary & Compliance Officer
Mukund Manohar Chitale Independent Non-Executive Director