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Edited Transcript of LT.NSE earnings conference call or presentation 10-May-19 1:00pm GMT

Q4 2019 Larsen & Toubro Ltd Earnings Call

Mumbai Jan 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Larsen & Toubro Ltd earnings conference call or presentation Friday, May 10, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arnob K. Mondal

Larsen & Toubro Limited - VP of Corporate Account & IR

* Jayant Damodar Patil

Larsen & Toubro Limited - Senior EVP of Defence & Smart Technologies and Whole-Time Director

* M. V. Satish

Larsen & Toubro Limited - Senior EVP of Buildings, Minerals & Metals and Whole-Time Director

* Ramamurthi Shankar Raman

Larsen & Toubro Limited - CFO & Whole-Time Director

* Sekharipuram Narayanan Subrahmanyan

Larsen & Toubro Limited - CEO, MD & Whole Time Director

* Subramanian Sarma

L&T Hydrocarbon Engineering Limited - MD, CEO and Director

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Conference Call Participants

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* Abhishek Puri

Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power

* Aditya Mongia

Kotak Securities (Institutional Equities) - Research Analyst

* Ashwani Kumar

Nippon Life India Asset Management Limited - Senior Equity Fund Manager

* Dhruvesh Shah;IDBI Federal Life Insurance;Analyst

* Girish Achhipalia

Morgan Stanley, Research Division - VP

* Inderjeet Singh Bhatia

Macquarie Research - Head of Research

* Nitin Arora

Axis Asset Management Company Limited - Equity Research Analyst

* Pulkit Patni

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Ravi Swaminathan

Spark Capital Advisors (India) Private Limited, Research Division - Assistant VP

* Sumit Kishore

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [1]

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Once again, a very warm welcome. The format of this meeting will be as usual. I'll make a short presentation to take you through the results.

The presentation was available for download on our website from 5:30 p.m., as you would have noticed in the invitation mail that I sent all of you. Hopefully you've downloaded it and had a look at it. After which, we'll invite Mr. Subrahmanyan, Mr. Shankar Raman and the other whole-time directors to the dais to take the Q&A session.

One small announcement, please keep your mobiles on silent mode or put them off, preferably put them off. Thank you for that. We'll start the presentation. The first slide is our standard disclaimer, primarily because we make some forward-looking statements, which may or may not happen due to circumstances beyond our control. I will take this as read.

The presentation outline is in 4 parts. So I'll first start with the group performance highlights. Order inflows grew by 16% for the year -- in a volatile year, leading up to the elections, and this was well above our initial guidance of 10% to 12% growth, primarily because we anticipated a bit of a slowdown in Q4 [period] prior to elections, but fortunately, the slowdown was not very significant.

The order book has consequently grown by 12%, is a significantly large order book close to INR 3,00,000 crores now. And one point I'd also like to make, the gap between order inflows and revenue is in excess of INR 35,000 crores. So obviously, that has led to an increase in the order book size.

Revenue growth. Revenue has grown by 18%, and this has been achieved by almost all business verticals. There's a notable EBITDA growth of 20%, which has mainly come from services business. And PAT growth has obviously been -- most of the EBITDA has flowed to the bottom line by way of PAT. And this is one of the -- as you'd be aware, one of our strongest levers for ROE improvement.

Some key financial indicators before we get into the details. This is a snapshot of the full year's Q4 as well as full year performance.

I will concentrate more on the full year primarily because, as you would be aware, in our sort of business quarterly numbers do not necessarily reflect annual numbers or are not amenable to extrapolation in any form.

Order inflows, as I mentioned, have grown by 16%. And obviously, this is an outcome of a strong government push on infrastructure. I'll deal with that a bit later. I've already mentioned order book growth at 12%. Revenues, just to also give you a data point, crossed $20 billion this year. Whether we take a 2-point forex average or a 5-point average, it's in excess of $20 billion. So that's also a milestone that we have crossed.

EBITDA, I've covered the EBITDA increase. PAT, I have also briefly mentioned. Net working capital, we did fairly well in pulling back net working capital. This is net working capital of businesses. And there's been a 200 basis points reduction over the last 1 year, which obviously has led to a lesser cash outflow in FY '19 compared to FY '18.

So that has had a salutary effect on the free cash flow performance, which is there in the annexures, if any of you care to have a look at it at a later point of time.

We have been walking the talk as far as our ROE journey is concerned, and you'll notice that ROE for FY '19 now stands at 15.3%. We still have 2 more years of our 5-year strat plan left before we reach our target.

Dividend. We've also increased the dividend this year by INR 2. And this again translates to a dividend payout in excess of 40%. This is significantly higher than the earlier payouts of around 25%, which were there quite a few years back for many years at a stretch.

I'll now go to the group performance summary. Order inflow, obviously this is the lifeblood of any E&C business because every single order has to be backed on its own merit. The order inflow growth of 16%, I mentioned has exceeded guidance because Q4 disruptions did not happen as anticipated. The composition of order inflows, I would also like to point out, has shifted in FY '19 to larger-sized orders. In fact, if you take orders above INR 2,500 crores, this year we got close to INR 40,000 crores of such orders compared to INR 15,000 crores in FY '18. That itself is an indication of our move towards larger ticket-sized orders.

There's been a strong growth of 31% in international inflows. And to a large extent, hydrocarbon has contributed towards this by a marquee order which we got from Algeria. You would have seen the press release earlier. Domestic private sector has also seen a pickup this year. And in the domestic segment, private sector grew by 54% actually, and primarily contributed by airports and as well as buildings and factories, some factories, some health care buildings and -- buildings and factory vertical essentially.

One other thing that I think merits pointing out is that the largest component of public sector ordering has come from the state government. And if you look at the order book, the order book, which is, as I mentioned, INR 2.93 lakh crores is still predominantly driven by domestic Capex, which accounts for 78% of the INR 2.93 lakh crore order book today.

Within domestic, the order book is again driven primarily by public sector, which constitutes 77% of the total unexecuted order book. And of that, state government is 35%, PSUs and central government are both 21% each. So the remaining 23% is -- constitutes private sector. So as is obvious, we are still largely being driven by public sector as a whole, our E&C business particularly. One thing about the order book is that our efforts to diversify into non-Middle East regions, which we have been pushing for quite some time, are now bearing fruit. And that accounts for around 45% of our international order book of INR 63,000 crores today. So we have a much more diversified order book, and these are from countries like in West Africa, Egypt, Algeria, Bangladesh, Sri Lanka, Vietnam, what we call nearshore geography, so to say. And in case of heavy engineering, they're also in developed countries.

Going to the next slide, if you analyze the sales and costs, the -- here too, as far as revenue is concerned, the growth of 18% is well in excess of our initial guidance of 12% to 15% where actually we have baked in a bit of a slowdown in Q4, again anticipating some slowdown due to the slowdown in government machinery prior to elections, which did not happen to that extent.

We ultimately notched up a growth of 18%, as you can see. The domestic market growth has been at 20%, has been stronger than international growth -- market growth, which is also reflective of the strong push on infrastructure build-out in the country.

You would also see the MCO expenses are more or less in line with revenues. I'll talk to that -- the effect of that on margins at a bit later stage. The finance charge OpEx is primarily financial services and finance lease expenses, which we take as operating expenses and not below EBITDA because the business model is such and is essential -- mainly financial services.

Staff costs, you'll notice, have gone up by 19%, which is a fairly large increase. And this has primarily -- we have added on an average -- average of FY '19 versus FY '18, around 7,000 people, which has primarily been added in the services business of IT and technology services because ultimately, for them, manpower is raw material, so to say. Reduced sales and admin expenses, you would see has happened, and this is primarily due to lower receivables as well as loan book -- loan book provisions on -- in financial services, both in the parent company as well as in the financial services company.

We also actually -- sales and admin also has some element of exchange gains, which is primarily due to our hedging strategy on portfolio hedges. Now we move from EBITDA to PAT. EBITDA increase of 20% is primarily from heavy engineering, defence, hydrocarbon and services business. Both are -- all these have boosted EBITDA. Finance cost of INR 270 -- INR 267 crores is the exact number, has been largely due to 2 factors: one is partial commissioning of Hyderabad Metro, which led to an additional INR 165 crore interest charge, and the rest is -- remaining increase is in line with our average levels of borrowings.

Other income, the growth is essentially treasury gains. Exceptional income, of course, is Bhushan write-back that we did because we got a favorable order from NCLT. You would also notice a fairly -- JV reduction in joint venture and S&A company PAT, which is consolidated on equity method. That means only share of PAT is consolidated and not line-by-line revenues and costs. It's primarily due to reduction in IDPL losses and -- which were largely driven by gains that we got on InvIT in the early part of the year as well as a reduction in losses in our forgings unit. The noncontrolling interest, you see has gone up quite a bit from INR 6 billion to INR 13 billion, and this is primarily because of the increased -- better -- much better performance of listed subsidiaries as well as higher dilution. So the larger part of the profit is taken away there.

Going to the next, I think, key segments, key subsidiaries and segments. This is a segment composition, is only for reference. Any of you can look at it at leisure, if you want to get deeper into this.

Now coming to the order inflow composition. This too is mainly for reference. We got 1 lakh 76,800 crores of fresh orders this year, of which infrastructure accounts for the bulk of it, 54%. Hydrocarbon has come to the party, so to say, this year, and it's notched up close to 16% of the total order inflow of the group.

I'd already mentioned the -- how we have diversified, and you can see that Middle East accounts for 8.7%, and the rest is of -- international order inflow is both from U.S. and Europe. And here, I would again like to reiterate that for purposes of arithmetical completeness, we add services business revenues to order inflows as well. And U.S.A. and Europe is largely due to infotech and technology services contribution there.

The order book composition, obviously this does not include services business. It's essentially E&C. And here, obviously the infrastructure is Big Daddy, it's probably our 400-pound gorilla in the room -- 800-pound gorilla as you can see.

Hydrocarbon share because of the heavy inflows in the current year, the share has now gone up to 13.6%, close to INR 40,000 crores. And I've already mentioned our diversification from non-Middle East -- into non-Middle East areas, which is evident in the pie chart giving the geographical composition.

Revenue composition, here again infrastructure is the largest. But as you can see, services contribution has gone up to 22.8%. And this is, of course, part of our strategy to increase services contribution. Hydrocarbon is close to 11% now. And our geographical split is also fairly widespread now.

Infrastructure segment. Revenue growth here has registered a good growth of 16% in FY '19, which is significantly higher than the growth in the last couple of years. Last couple of years was considerably subdued. This is due to reasonably good execution conditions, a large opening order book as well as customers, our ability to collect money from customers in slightly stronger fashion, which enables us to ramp up execution as well.

We had covered margin erosion in some transportation infra projects in Q3. So I will not dwell on that. That has also led to a decline in full year margins. Some other factors which also affected margins. The proportion of cost-jobs also tends to affect margins because we started recognizing margins after crossing 25% threshold. And if some jobs, which are anticipated to cross margin recognition in Q4, did not happen. To just give you some ballpark, and I will not give you the exact -- I can't give you the exact number, but to give you an idea of the effect that it has, suppose out of the total, say, INR 40,000 crores of revenue, even INR 2,000 crores get shifted, doesn't come into margin recognition.

If you take an average EBITDA, say, 10%, just for saying that, that means a INR 200 crore difference in EBITDA margin itself. On a 1 lakh 20,000 crore turnover, INR 200 crore difference means what, a 15 basis points. There itself swing can happen. So to some extent, we do get affected by that. There are also, in some fixed-price contracts, which were bid 3 years ago and are towards end stage of execution, we had bid at a time when steel was maybe around INR 30,000 a tonne, today it's INR 40,000 a tonne. So in some cases, we do see commodity price having an effect on fixed-price contract margins. However, these should get flushed out over the next few quarters. And the current order book obviously factors in current prices as well.

And incidentally over the -- hopefully next year, we should see an improvement in Infra margins. Be that as it may, overall the Infra segment has shown reasonable growth this year after a slightly muted growth in the last few years.

Power segment, I think the declining fortunes of this sector are well known by all of you. I need not dwell on it. Suffice to say that overcapacity and cutthroat price competition continues to plague the sector and continues to affect us as well. These are reflected both in order inflows and revenue numbers. This year, we expect something around 6 gigawatt of coal-fired power plants to get ordered out, and we hope we are able to bag at least one of them, bagging one of them means a $1 billion -- close to a $1 billion worth of orders.

What is also happening is that retrofitting of old plants with emission control equipment, primarily through gas desulfurization and selective catalytic reduction is also giving rise to opportunities, and we expect that in FY '20, around 40 gigawatt of old plants will get retrofitted with this, which will give rise to some opportunity for us.

The Bangladesh orders are progressing well and contributing to both revenues and margins. We're also targeting some international jobs this year. Here, as far as margins are concerned, there's not much of a difference between 3.4% and 4.5%. But here, I would also like to point out that this is somewhat of an optical illusion because the margin-heavy business within this business vertical lies in our joint ventures which you have with MHPS, and those are consolidated at PAT level. So revenues and costs are not aggregated. If you aggregate all of that, it's well above 10%, in any case.

So overall we think it's okay, as long as we can keep our order book replenished. Now going forward to the Heavy Engineering segment, as you can make out, this segment has done exceedingly well this year. In fact the order inflow growth -- grow -- order inflows have grown by 78% and largely contributed from by international orders and that too from developed countries. And in oil and gas sector, revenues have also grown significantly on the back of a fairly decent order inflows and timely and efficient execution. The business has yielded very strong margins, which is a testimony (sic) [testament] to its technological progress, its global size and scale as well as its proven track record. And that's why it gets high margins like this.

The business also has a healthy backlog of around INR 5,000 crores -- close to INR 5,000 crores. And almost half of which is international. So hopefully, next year should also be a good year for this business.

Coming to Defence Engineering segment. Here, as all of you know, political and bureaucratic delays and uncertainty has dogged the sector for many years, which 5 years back, this was considered to be a sunrise sector in view of the government's focus on involving the private sector in defence manufacturing in a much more meaningful manner, which has not really happened. So -- however, we did get some decent orders in between, and the business has a healthy order book of over INR 10,000 crores and is registering good revenue growth and strong margins. Of course, in this year, a large part of the revenue and margins have also been contributed by execution of the tracked

artillery gun order, which all of you would have read in the media. We've already started delivering those guns.

The margins actually reflect stage of execution, job mix as well as operational efficiency. And that's why you would also see a swing there.

Electrical and Automation segment has shown strong growth of 13% revenues in FY '19, and it is primarily due to robust offtake in our electrical standard products and metering products business, which is our products business from almost across the board. Industrial business as well as agricultural sectors have contributed to this. The business is holding onto its strong margins through operational efficiency as well as a good profitable sales mix.

The next segment is Hydrocarbon segment. And here, obviously this business has seen significant ramp up, particularly I mention order inflows. It's now crossed INR 25,000 crores. It was -- I think last year, it was around INR 15,000 crores. So it's bagged some very healthy orders, large orders, and revenues on the back of large order inflows also grew by 29% during the year. I also mentioned that order wins included a mega sized order from an Algerian customer. Revenue growth of 29% was essentially an outcome of good execution and large order book. Margin has also grown, and these appear to be sustainable, and this is, again, due to efficient execution.

Here, I must also point out that while margins may look optically low compared to some other sectors, they are in line with global hydrocarbon margins. And one other factor is that this business has one of the highest ROCs if you -- from the published advertisement, if you reduce tax from PBIT, you'll get no PAT and you take the average net segment employed, which is capital employed and you calculate the ROC, even at the closing point and not average, ROC still comes to close to 40% reported.

Developmental Projects segment is a bit of a segment in a state of flux. It constitutes develop -- Power Development business, which is essentially a Nabha Power Plant, Hyderabad Metro, parts of which have been commissioned and as well as Kattupalli Port, which we divested in Q1 of the current year. So it's a bit of a mix. Now here, the revenues are largely contributed -- out of INR 5,000 crore revenues, close to INR 4,000 crores of revenues are contributed by Power Development business, which is our power plant in Punjab. Hyderabad Metro, we did partial CoD of 30 kilometers in November, 16 kilometers in September, 9 kilometers in November -- 17, sorry, and 9 kilometers in March '19. A total of 55 kilometers. And because of the fluidity and there's many moving parts, the margin profile in this business is still emerging. So you can't read too much in variation of the margins from 6.3% to 10.3%.

Here again, I'd like to mention that IDPL, which is essentially operational roads and one transmission line, is consolidated at PAT level under equity method, so that does not appear either at revenue level or EBITDA level.

IT and Technology Services, I think all of you have already seen the results -- the listed companies for the purpose of report -- segment reporting, we club them together into one segment. And both LTI and LTTS have raised a noteworthy growth in FY '19, leading to a total net revenue growth of 28% during the year. LTI revenue growth has been led by a number of segments, within 5 or 6 segments they operate. I won't read out every single segment.

Similarly, LTTS revenue has also been led by multiple segments -- has been led by multiple segments throughout the year. And here margin improvement, you would have seen, has moved from 21.4% to [23.2]%. The improvement is actually aided by both currency gains as well as operational efficiencies, including things like they've increased their utilization. That has also helped. The other segment is essentially products and -- Industrial Products & Machinery, IPM, constituting construction mining business, valves and rubber processing machinery, and Realty business. The previous year includes a small portion of welding products, which is not significant. And here, the revenue growth has -- and margin growth has primarily been contributed by Realty business on 2 fronts: One is, you'd be aware that we shifted over to Ind AS 115, the new accounting standard in FY '19, where revenues are booked based upon handing over of flats and not on percentage of completion. And this year, we handed over a substantial amount or number of flats, including in Crescent Bay, and that has led to large revenues. Plus, we also divested a commercial space, which led to a bit of a lumpy gain. However, here I'd also like to point out that many people keep on asking me that, is it a one-off? The answer to that it is, it is not one-off; it may be lumpy. For example, if I'm building a tower of 200 flats, I'll not book revenues till I hand over the entire tower and the entire revenues and margins will come there. But it's not that I have only one tower to hand over. In fact, out of the 4 projects that we are currently doing, Emerald Isle Phase I, Phase II, Crescent Bay and Raintree Boulevard in Bangalore, these 4 projects together constitute a total of around 4,000 flats, of which we have handed over 1,500 flats. So the remaining 2,500 flats are yet to be handed over, which will accrue to revenues over the next couple of years. So it's -- while the revenues may be lumpy, it's certainly not a one-off.

And of course as I mentioned, it also contains sale of some commercial property. L&T Finance Holdings Group, this has already been -- it is a listed company. They published their results. They have grown exceedingly well, both on revenues, which is basically income from operations as well as on the PAT front. PAT has gone up by over 80%. Their mutual fund business has also grown significantly. It's crossed INR 65,000 crores. The net loan book is almost touching INR 1 lakh crores now. It's a very good performance in a volatile environment. As all of you will be aware, after the ILFS saga sometime in September last year, there was a severe sharp contraction in liquidity, and they managed to [tie a] -- they managed to navigate that stormy weather fairly well, and they've managed to actually do a good risk management, which is one of their focus areas. And one of their focus areas is increased utilization, and they've been doing fairly well on that as well.

The -- actually, the profit growth has mainly been obtained through improved net interest margins and fee income as well as improving asset quality because they have incurred lower credit costs in FY '19 as well. And their focus areas along with proper risk management in areas like asset liability maturity mismatch, in terms of interest rate sensitivity as well as focus areas and diversifying their funding profile, all these together are essentially under risk management, and they think that they can sustain top quartile ROEs that they've started to deliver.

Now I go on to one -- my last slide. It's, as usual, a bit of a complicated slide. I will not dwell on every single aspect of this. It looks like a bit of a sunrise picture, and I hope that this presages sunrise results for us over the next few years as well. The bottom semicircle represents components of our strategy. And you'll see that there is a small -- there's a building there. We think that, that encircles a very strong edifice. A strong building is known as an edifice, and we think that is what L&T represents. Here, I'd like to mention that business portfolio is a very important thing, particularly in contexts of things like Mindtree acquisition and growth of IT and Technology Services and Financial Services because services business has a higher PAT profile, and it improves the EPS as a profile as a whole. I will not elaborate on the other components.

Now just to explain the side outside that semicircle, all the factors outside the semicircle represent external factors that affect L&T either directly or indirectly in some manner, some directly and some indirectly. For example, state government spends would affect us directly, whereas a fiscal deficit would affect us indirectly.

Now here again I have categorized it into 4 broad areas. One is global factors, one is government policy, one is macro drivers, and the other are sectoral drivers. I've purposely put in some -- you'll notice some points in green font. The green font ones are the ones which give positive tailwinds to our business. Actually, 6 months back, things looked very dismal. There were concerns on oil, currency, fiscal deficit, current account deficit, election overhang, liquidity, global trade wars, all sorts of things were -- concerns were there, which have receded now.

Sector, I'll just touch upon the sectoral drivers. We see strong investment momentum in areas like water, metro rails, airports, Power, T&D, hydrocarbon as well as some -- as I mentioned earlier, pickup in urban buildings. Macro drivers which are worthy of mention, I said one is increasing tax revenues on a widening tax base. To a very large extent, this is due to the earlier reforms of demonetization and formalization of the economy post GST.

Benign inflation, fiscal deficit is under control, decent nominal GDP growth of around 11%. And of course, election overhang is there. But at best, we'll get affected maybe in the early part of the year, as mentioned earlier.

Government policy has been supportive over the last 5 years, and particularly as far as state government CapEx is concerned, and initiatives like the Saubhagya where we've got some traction, and we've also seen strong PSU CapEx. Setting up of the IBC is also very positive structural reforms, which could kickstart private sector investments. And of course, steady lowering of benchmark rates from -- over the last 5 years from 8% to 6%. Considering all this, we would have already heard Mr. Shankar Raman and S. N. S. talking about guidance, but just to reiterate, we expect an order inflow growth of between 10% to 12% this year on the consolidated entity level. We expect a revenue growth of between 12 -- sorry, order inflow growth of between 10% to 12%, revenue growth of between 12% to 15%. And this year, as far as EBITDA margins excluding services business is concerned, we had guided for 10.5% -- last year, we had achieved -- FY '18, we had achieved 10.5%. We had guided for maybe an upward bias of up to 25 basis points. We've come in with exactly 10.5%, same as last year. And in FY '21, we think we should hold a steady margin of around somewhere at that level.

With that, I'd like to conclude. But before -- just one small thing, there are a number of annexures, including cash flows and stuff like that, and -- where you can see it -- refer to it at your leisure. Thank you.

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Questions and Answers

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Inderjeet Singh Bhatia, Macquarie Research - Head of Research [1]

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This is Inderjeet from Macquarie. My question is on order inflows. We had a very strong year in FY '19. And FY '20, we have 1 quarter which could go into elections -- completion of elections. Can you throw some light on the confidence in why 10% to 12%, which are the key sectors, which can contribute geographical mix?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [2]

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It's a very good question and very complex question to answer. I'll try to simplify it. In the previous year, we thought that the elections would come in the last quarter. And we had budgeted based on that. We managed to achieve a reasonable growth over the last year -- not a reasonable growth, a fairly good growth over the previous year. This year, we are hoping that the first quarter may not be that good because what as is expected, a new government is expected to be sworn in, ministers have to settle down. And therefore, the first 4 months of the year may not be, from the decision-making point of view, that pertinent, especially for government and state government jobs. And therefore, that has been taken into consideration. We are hopeful that overall, we see a positive momentum, both in domestic as well as in the international areas that we are in. It is based on the fact that there are many schemes and very big schemes and projects that have been announced. There is but no other choice, that some of it to be taken forward in the natural momentum of things because funds have been tied up -- multilateral funds and such have been tied up. Therefore, there is that imminent feeling that these projects would have to be taken forward, come what may. And the international point of view, in the geographies that we are in, we are seeing good prospects as we look at it right now. And we are hopeful that from a market perspective, we should be successful in our normal way of business. That gives us a good feeling that whatever we are projecting next year, the 10% to 12% order growth should come through.

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Inderjeet Singh Bhatia, Macquarie Research - Head of Research [3]

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One more on capital allocation. Now given that we have got the approval for electrical automation sale, potentially that cash can come through in this fiscal year, and we have not been able to do the buyback, what do we intend to do with large cash flows that are coming in, in this one-time big cash flow?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [4]

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Inderjeet, this will take time. What we have right now got is the in-principle approval. This is not a subsidiary or a business that was -- that -- or a wholly-owned company that was getting transferred. This is a business unit within the firm. So lot of nitty-gritties have to be gone through before the final transfer takes place. So the cash flow to come in will take some time, so we have adequate time to think of what to do with that money. And we will take the decision appropriately and keep you informed. Let's enjoy the money for some time, let's hold the check for some time and have some fun with it, and then we decide what to do with it.

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Girish Achhipalia, Morgan Stanley, Research Division - VP [5]

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Sir, this is Girish here from Morgan Stanley. Just on the margin profile for the core business. The guidance is flat. Obviously there have been some one-offs last year, where we've taken provisions. But just wanted to understand, going forward, are these one-offs likely to continue? Because we're expecting Infra margins to be better next year at an aggregate level, and some of the other businesses like even Heavy Engineering and Defence are reporting sustained -- even Hydrocarbons are reporting sustained margins. So I just wanted to understand arithmetically, why wouldn't the margins increase from these levels? And why are you holding flat guidance?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [6]

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Would you like to answer, R.S.R.?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [7]

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See, the margin profile is a mixed combination of all segments that come into play. As far as E&C business and Infra segment margin is concerned, I think there is an expectation that if things go according to plan, we will see an improvement. At the same time we've had, in businesses like Realty, sale of assets which add to the margins in the year in which such transactions take place. And if there are transactions that are not scheduled to happen during the current year, then there is a contraction there. So when you mix match, some of these dynamics business-wise, we come to the conclusion that while all of us would strive for numbers higher than whatever that we are projecting, be it orders, sales or margins, from a guidance point of view it is better to guide stable environment because there's a lot of concerns expressed in private conversations about the credit squeeze, the lack of money that the government might be faced with. The GST is not providing the kind of momentum that it was expected to provide, resistance to formalization of economy, et cetera, et cetera. So there's a fair bit of skepticism we saw around funding availability. We don't find the banks in any great shape, as we see today, for them to bounce back very strongly to finance infrastructure projects. Private sector CapEx is going to be selective. So when you look at margins in the context of incremental orders as well as the headwinds that are likely to be for execution, I mean you have been reading news releases about. It's not enough to win orders, but also it's important to be allowed to work and there are enough and more out of the 130 crore people for public interest litigation. Because while everybody wants to enjoy good infrastructure, the inconveniences it causes when it is being built is not everybody's cup of tea. So I think from a balanced perspective of execution going forward, while we do believe that margins will get stronger from here, it is better to model a stable margin environment, and that's the reason why we are projecting what we have.

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Girish Achhipalia, Morgan Stanley, Research Division - VP [8]

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Sir, last question on working capital. We've done a tremendous job, particularly even in Q4, despite all the issues that were there. So going forward, do we expect to maintain it at this level? Or can it further come down in FY '20?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [9]

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See, we've spoken about this earlier. From 20%, we have moved down to the 18% levels. Working capital is a function of the cash flow in the system. Increasingly we find the customers, be it government, be it private sector, are preferring orders which has back-ended cash flows to it. So what used to be a scenario where we used to have working capital at 10%, 12% of revenues for executing a project, is now -- the new norm seems to be around 15% to 20% band. When viewed in that context, I think 18% is an optimal level, and it is very hard work to get there. So it's going to take equally hard efforts to stay there. I don't see a large drop from here as a result of further intensive effort to reduce working capital, but it could be anywhere in the band of 15% and 20%. So maybe we will try to see how to get better from here, but it calls in for wider cooperation from the entire ecosystem. The clients are still hanging onto cash flows for their own good reasons, towards the back end of the project. The advances are shrinking. We used to have much larger advances in our balance sheet when we keep winning orders of this magnitude.

I mean we must recognize the fact that the base has become so strong and large, to grow on this takes in lot of effort. And to make sure that you get the right projects, also means that you need to be in a position where you can trade the strengths versus the commercial requirements. So if we run a very strong balance sheet, I think that balance sheet should be used. Otherwise, what is the point in having a strong balance sheet? So if I want good, profitable projects, I should be willing to trade some amount of working capital. We are comfortable at this 16%, 18% band, and we hope to stay within this range.

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [10]

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Just to add to Shankar, it's also -- yes, just to add to what R.S.R. said, the past few years have seen a predominant of government orders, which has inbuilt clauses like cash retention, 3 months' payment, advance with interest, which we try to avoid, no material advance, no plant advance and also back-ended payments. So I think this also has -- and that's not as predominant in our backlog today because the private sector has not pushed it forward. And in Middle East also due to various reasons, payments have taken its own time. Normally, we used to get it in 60 days. Now it takes 90 days to realize payments. I think these are the factors which have increased working capital. I don't think the situation can get any worse. You find the oil prices stabilizing. We hope that [Indian] fiscal, the worst is over and things would -- can get only better. And therefore, having said that, so what he says stabilizing at this level is -- would be somewhat what we'd hope to look at.

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Nitin Arora, Axis Asset Management Company Limited - Equity Research Analyst [11]

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This is Nitin from Axis Mutual Fund.

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [12]

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Who's talking, please? Can you put your hands up?

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Nitin Arora, Axis Asset Management Company Limited - Equity Research Analyst [13]

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Nitin from Axis Mutual Fund. My first question is how we should look at your real estate sales because when we look at Q4, that also impacted your margins because of no bookings or the bookings must be less. So just want to understand how much we should look at as the real estate income for next year? And what was that number for FY '19? And my second question is related to Hyderabad Metro. When we are looking at full commissioning, and what was the number in FY '19?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [14]

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So to -- I may not remember the numbers correctly, but let me tell you the facts as I see it. The real estate, we have only 3 ongoing projects as of the moment. One is the Bangalore project, the Raintree; the second is the Crescent Bay project in Mumbai, and Powai is -- we still have some permissions regarding the next phase and that is to move during the year. Mulund is a new project that we are starting. So real flats that are available for sale would be Crescent Bay and Bangalore. Bangalore is doing quite well. Crescent Bay, we are now with the larger flats, which is the 3-bedroom and such. And that's seeing some traction because of the general trend in the industry.

Whatever we could sell, we have sold. And what is not moving now is the bigger flats in 2 of the towers -- 3 of the towers that we have built. We are building 1 more tower, but that will take another 1.5 years to complete, and after that the sales will start in that. So the amount of sales available today though Arnob said is 4,500 total flats available and 1,500 yet to be sold. It will see some traction in Mumbai at least. But Bangalore should move quite well. We are starting Seawoods Residentials (sic) [Seawoods Residences]. We had fairly good bookings there, and it needs to be converted. But the real construction is yet to start. That will take maybe -- the construction would take another 1.5 years to complete before real sales could be effectuated there. Therefore, you're having a situation in real estate where the big projects like Powai, the Phase 1, Phase 2 that we did, the Crescent Bay 3 towers already are over. And unless we have good stock to move, it will see some traction. But as such, the business is doing well. We are a little conservative and careful about the kind of deals, the joint ventures that we need to have. We are not buying land. We are going through joint venture route. And that kind of approach does take its own way of going about it. But we are very positive and confident about that real estate sector.

On the commercial side of real estate, we have taken a decision internally that some of the properties that we build, we will not sell. So you had some lumpy sales this year -- I mean last year and the previous year. We said we'd build properties, and we'll lease it. That's a new model that we are trying. And let's see if it succeed. And if it succeeds, we'd like to own some properties and lease it over a period of time. So that's what we're planning to do to the tower in Bangalore and to the tower in Powai. We'll take a look at it. And if that model works out, that's another way to go about business. So there you'll not have lumpy sales, but you'll have leased income to come in. And the idea is to have some base income or annuity income in that particular sector. So these are ideas that are working through. These are work in progress, so let's see how it moves.

On Hyderabad Metro, I think the project is in its final stages of commissioning. I think by -- one -- another phase would be commissioned somewhere in June, July, and the final -- the total length, as we see, that's about 62-odd -- 68-odd kilometers would get done by September odd, and then the entire project is commissioned. From whatever we have commissioned today, the footfall seems to be good. The people seem to have a positive and favorable impression on the project. They seem to be demanding more of it. We also created a good ecosystem of getting the hub and spoke, where people are brought in to the major stations so that they can catch the train from one major station, go to the other side and come back and take -- go back to the house. So a lot of e-vehicles and e-autorickshaws and e-scooters and e-cycles and ecosystem of such have been created. Project seems to be, from that point of view, doing well, and we need to take it forward now.

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Nitin Arora, Axis Asset Management Company Limited - Equity Research Analyst [15]

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And just last question on the capital allocation. We saw that your interest in acquiring an IT company, which you did, which would suffice and if the balance sheet had that cash. There's another cash which is coming in L&T which is already approved by CCI. The thought process, just want to understand, is it something that we're going to, again, look at acquiring a company in any other segment, let's say our defense or somewhere else?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [16]

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Broadly, to answer, I will not answer questions on Mindtree per se right now because it's under various stages of discussions. And I think Shankar has been on the -- on many meets, including telecons with the analysts who tell you about what it is, and the transcripts are all available with you people. The idea stated is very clear, that we would like to increase the portfolio of services within the overall business portfolio of L&T. And that was the reason why we went for the said matter. But having said that, we have no other major acquisition plans or anything else in view. From the regular businesses point of view, tuck-in acquisitions, what we mean is, for example, in our IT business we do, within LTI or LTS, we do buy in small companies, which have either talent or a particular kind of implementation softwares or applications or solutions or something on digital, which we are not able to do in-house available, is a niche talent done by very specific group of people. We do, do these tuck-in acquisitions to enhance our offerings therein. And that's a continuous process. But these are not major investments. These are relatively smaller investments. So that's the way we look at how to grow the business. And having said that, we have done what we need to do. Now the idea is to sweat it out and see how to move it forward.

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Sumit Kishore, JP Morgan Chase & Co, Research Division - Research Analyst [17]

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Sumit from JPMorgan. Sir, my question is related to the Infrastructure segment. We understand that it has a long gestation period of execution. But some of the issues which have put pressure on margins, including stage of project execution, project mix, commodity price pressures in last quarter, the provisions that you took for the transportation segment, I mean which of these factors, could you give some color, would reverse in the coming quarters and lead to margin improvement? And for instance, how big are the provisions we are talking about in the transportation segment? And are they behind us?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [18]

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We have -- essentially, the problem has been on the transportation side, to be honest and clear. We've had some problems in the execution of jobs at both Oman and a few jobs in India. These are typical problem, and one could say one need to have envisaged it or looked it into in a much better manner, but we could not. These have happened because of project delays, which have happened predominantly due to right of ways, happened due to mining bans in India, happened due to design changes and approvals which have taken time beyond what we thought about. And some of it is due to execution on our side. And predominantly, it is due to approval process or right-of-way clearances from the client side. So we are contractually strong on these matters.

But having said that, when having mobilized the job and then some of these issues occurs, there's a cost overrun that takes place. So business has taken a INR 300 crore negative this year at a PAT level. I feel the problems involved have been sorted out. Now what we do in such cases is that we recognize the losses as it should be because we have no habit of taking claims and recognizing incomes and profit thereon based on that. So we have on a logical manner, based on contractual provisions, are taking up these matters with the clients concerned, both in international, especially Oman and in India with NHAI and dedicated freight corridor. We are hopeful that either -- and this takes time because you had to go through a process of dispute resolution, and then you have to -- clients may want to go for arbitration based on that. Hopefully nowadays they don't go for court cases. They try to -- once the arbitration is over, they call us for a meeting to sort it out. And we are quite sure this process will be the logical course to follow. But this takes time. [The] AB takes 6 to 9 months, and then the arbitration takes an year at least after that. We are hopeful that some of the claims would be realized during this year and a few could be realized the year next on. So I think that, that fact that this [thing's out] to be repeated will not happen and what was to be taken into account has been taken into account.

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Sumit Kishore, JP Morgan Chase & Co, Research Division - Research Analyst [19]

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My second question is on defense. Over the next 12 months, what would be the order prospects that you're looking at? And do you -- I know there's been a long spate of disappointment, but what is the outlook there?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [20]

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Patil, would you like to answer?

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Jayant Damodar Patil, Larsen & Toubro Limited - Senior EVP of Defence & Smart Technologies and Whole-Time Director [21]

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We don't really expect too much of a traction because there won't be government in place till June, literally, any function in government. 9 months is too short a period for government to take a call. So it's one of those momentum kind of a scenario. So we don't see something very flashy happening over the balance 9 years when the government would be in place. I think we have to wait, balance 9 months really, the quarter 2, 3 and 4. But possibly next year, one can look forward to something. Of course, there's a good amount of traction we expect picking up on the RFPs. And that's essentially will keep us busy, keep us occupied in terms of what we need to be doing to ensure we win them.

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Ravi Swaminathan, Spark Capital Advisors (India) Private Limited, Research Division - Assistant VP [22]

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Sir, this is Ravi from Spark Capital. One question is with respect to the international markets, we have seen a fair bit of growth in international markets and especially from non-Middle East space. So what is the kind of growth potential that you would be seeing? And what are the verticals where we are already there and we can see further growth potential and the new verticals or subsegments from which we can see incremental growth in the international space?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [23]

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I'll try to answer it in 2 parts. First part, I will answer it on the overall basis, then I'll request my colleague, Sharma, to give you little more details on the hydrocarbon space because that's where we see the maximum traction. Overall, as an organization, we said we need another geography to go by, and that's why we entered Middle East. Middle East continues to be the major players where we see business to come in from. There are 3 predominant businesses there in our hydrocarbon, power transmission, distribution, and to a certain extent the water business, which has found good traction in Middle East. Beyond Middle East, we have entered the 7 of Africa. That is the North and the Eastern part of Africa, countries like Algeria, Morocco, Tunisia, Egypt. And then on the upper East, you have Tanzania, Kenya, and the lower East you have Zambia, Malawi, Mozambique and such. We have orders in all these places. I think at the moment, our backlog in Africa is about INR 14,000 crores, predominantly led by hydrocarbon again with the major breakthrough that we have in Algeria with SONATRACH. We also got into Bangladesh, which is a fairly big area for us, both on power as well as on railways and on one infrastructure project, which is a big bridge. We also have jobs going on in Far East now, especially Malaysia, Thailand, and we expect some breakthrough in Myanmar also. These are predominantly power transmission distribution jobs. So these are the continents. These are the areas that we were -- that we want to concentrate on for the immediate future. We may possibly look at CIS, but that's, let's say a medium-term view. Our short-term view is only these 3 geographical areas. S.S., can you add?

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Subramanian Sarma, L&T Hydrocarbon Engineering Limited - MD, CEO and Director [24]

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You covered it quite well. The general outlook in Middle East is much more positive than what it was before, couple of years ago, primarily due to stabilization in the oil prices. And the growth is, again, predominantly led by Saudi Arabia, Kuwait, and now Qatar is also coming back. I think Qatar is also -- Qatar has been spending more on the infrastructure for the FIFA World Cup-related work. But now that -- most of that work is now underway. So they are moving back again to oil and gas. LNG capacity, they're going to add. So I think these are the 3 main countries: Saudi Arabia, Kuwait and Qatar. And also UAE, particularly Abu Dhabi, has announced a significant amount of projects in petrochemical. They're talking about investing $45 billion in the next 6, 7 years. We're seeing some traction, but it's going to be a little bit slower than the rest. But overall I would say that the investment is -- capital expenditure is coming back. And -- but the market is competitive. So it's not that -- unless it picks up significantly, I think the competition level will remain intense. And therefore that's why we are also looking to diversify further into other geographies. And as S. N. has said, that we looked at Algeria and Africa.

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Ravi Swaminathan, Spark Capital Advisors (India) Private Limited, Research Division - Assistant VP [25]

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Are there more orders in pipeline from Saudi Aramco? I mean, we have a technology -- I mean, we are a preferred contractor to them, right? So...

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Subramanian Sarma, L&T Hydrocarbon Engineering Limited - MD, CEO and Director [26]

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Yes, Saudi Aramco particularly, we've been quite busy in offshore business. And we had sort of good breakthrough about 3 years back by winning one of the large projects, $1.6 billion, and we completed that project. I mean the project director is sitting here, Partha. And we did well, actually. So we had a strong performance on that job, and that has established good credibility for us with Saudi Aramco, and we are continuously now winning more and more awards. And we have bid for some large packages, particularly in offshore, Saudi Aramco will be spending and then this year itself about $7 billion or $8 billion, and we are quite actively participating, and it should -- I'm quite confident and hopeful that we will have a decent share of that.

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Ravi Swaminathan, Spark Capital Advisors (India) Private Limited, Research Division - Assistant VP [27]

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Great. And my last question is with respect to the bid pipeline. So how much has hit this year as of now for domestic, international? And if you can give a comparative figure compared to last year?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [28]

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You're asking for the entire company, or you're asking for hydrocarbon?

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Ravi Swaminathan, Spark Capital Advisors (India) Private Limited, Research Division - Assistant VP [29]

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For the entire company.

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [30]

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See, let me try to answer this. When we look at the prospects, the way we analyze our potential for the subsequent year is we map the prospects. And if you map all the segments, all the sectors where we are interested, the total prospect size comes to something like 9 lakh crore to 10 lakh crore, okay? Now we're not getting into the timing of when exactly this will happen, but these are the prospects that we would like to pursue.

The general strike rate has been anywhere between 20% and 25% from the -- for the company historically. So we do believe that based on this strike rate, assuming that things move normally, we should see somewhere between 1.8 lakh crore to INR 2 lakh crore of fresh orders that should benefit us. Now this is the kind of guidance that we have put out based on 1 lakh 76,000 crore, 10% to 12% increase would take you to about 190 lakh crore, 195 lakh crore. So if I were to break that 9 lakh crore, about 4.5 lakh crore, 5 lakh crore is in infrastructure, various segments of infrastructure. We have power transmission and distribution about 1 lakh of crore. And generation, and assuming that the environment continues to be as tough as it is now, could be about INR 50,000 crores. So about 1.5 lakh crore in that power generation distribution.

In hydrocarbon itself, between onshore and offshore, between domestic, international, there should be something like 2 lakh crore, 2.5 lakh crore as potential, possible, and then all the rest of the business. So if you really add 8.5 lakh crore out of 9 lakh crore comes out of these 3 big verticals: infrastructure, power, including transmission - distribution and hydrocarbon. Our belief is about 25% of this would be about international and about 75% of that would be domestic. We've been trending around similar percentages for the last couple of years. So barring some change in strategy necessitated by some local developments, we do think that, that 75-25 would play out. This would also mean by reference close to 30% of the revenues coming in from international orders. That's ballpark where we are.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [31]

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Sir, this is Abhishek Puri from Axis Capital. Just wanted to understand a little bit more detail on the infrastructure segment, since that is the biggest contributor to your order book right now. Last year you spoke about the water segment being one of the biggest contributors. So could you just throw some light on the details of the Infra segment?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [32]

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I think most of the business in Infrastructure segment have done well. Buildings have also had a record order inflow this year, especially from airports and hospitals and to a certain extent from the IT sector. Transportation has not had that good a year. Of course, we managed to pick up some big projects like the Dwarka Highway and the Nagpur Highway and the runways for the airports. Heavy civil has had a reasonable year. We picked up Bangalore Metro, the coastal road and few other big projects like that. Transmission has done very well. They have also had a record order inflow this year, nearly INR 21,000 crores, orders from India, Middle East, Africa and to a certain extent from Far East.

Water has done very well, predominantly Indian orders, both water, waste as well as lift irrigation schemes. They also picked up a few international orders both from, predominantly from Middle East. So overall -- minerals and metal have also done reasonably well. They picked up an order in the first quarter of this year. It could have come last year. It's a gold processing plant in Saudi Arabia, which you must have all read about. So as such, infrastructure orders across the segments have been good. The one sector which has not done that well could be transportation, but that could be a temporary phenomenon because the number of road orders that came out last year was not to that extent that it ought to have come out to. And predominant jobs that came out are also in the BOT or the HAM space. And predominantly in the HAM space, we are not participating. And to that extent, I think that sector went down to that part. But other than that, overall it has done well. Lifting has nearly -- brought in nearly INR 96,000 crores worth of orders. And that's a good growth over the previous year.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [33]

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Could you also detail out the prospects for the next year on the segment wise? And have you built in the bullet train and the big refinery, West Coast refinery order in this?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [34]

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I think R.S.R. clearly clarified the kind of prospects and the orders inbuilt therein. One would look into the fact that there's a high possibility of the high-speed corridor coming up next year. But we also have backups for that, and that is part of the overall prospect, yes.

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Subramanian Sarma, L&T Hydrocarbon Engineering Limited - MD, CEO and Director [35]

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West Coast refinery, we don't envisage that to happen this financial year.

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Aditya Mongia, Kotak Securities (Institutional Equities) - Research Analyst [36]

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Hello?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [37]

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May I know who is talking?

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Aditya Mongia, Kotak Securities (Institutional Equities) - Research Analyst [38]

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Yes. This is Aditya Mongia from Kotak Securities. Sir, I had 2 questions. The first question was on the Buildings & Factories segment. And this is a segment which after maybe 2, 3 years is a segment which is driving the growth for the company at this point of time. My sense is about 20% share of our inflows would have come this year, if not more. Could you give us some more color as to which subsegments within this one are driving growth at this point of time?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [39]

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You're talking within Buildings & Factories, or you're talking overall?

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Aditya Mongia, Kotak Securities (Institutional Equities) - Research Analyst [40]

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Within the Buildings & Factories segment.

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [41]

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Satish, would you like to answer?

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M. V. Satish, Larsen & Toubro Limited - Senior EVP of Buildings, Minerals & Metals and Whole-Time Director [42]

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Yes, we think the Buildings & Factories, what is driving now the business [rate] is the airports and the hospitals. So as you know, we have been giving that we've got some mega projects in the airports within India and also a lot of hospitals in India and in the Northeast.

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Aditya Mongia, Kotak Securities (Institutional Equities) - Research Analyst [43]

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Got that, sir. The second question was more -- so I think Arnob started by saying that about INR 40,000 crores of order inflows have come in the bucket of fairly large-sized orders, which is INR 2,500 crores, and obviously it's a large number. When we talk about next year, the fact that such a large quantum of large-sized orders is coming in, does it in any ways impact the revenue growth, working capital and the margin assumptions?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [44]

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The guidance that we have put out on revenue of 12% to 15% does factor in the large-sized orders that is in the bag. So as you possibly rightly are meaning, those will take little more time than normal orders, quick turnaround orders, but that's been factored. So when we are guiding this out, we are taking that into consideration. And so is the case with margins.

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Unidentified Analyst, [45]

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Sir, this is [Ankush] from JM Financial.

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [46]

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You are from?

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Unidentified Analyst, [47]

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JM Financial. So sir, in the initial, Arnob told that the domestic order backlog breakup is 35% from the state government and 21% center and PSU and rest is from the private sector. So how do you see for the next 2, 3 years now the major traction in ordering activity from the sector? Would you throw some more light on the private side -- in the private side which segment is more ordering activity that you see that CapEx is happening actually?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [48]

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So we do believe the trend that's on now will continue. This year we've had some slightly favorable trend in the sense that we managed to get some fairly large private sector orders from the airport, the expansion of Bangalore, Hyderabad, Delhi and such. And we have also got some few private hospitals and some office spaces, which are -- which had disappeared, in the sense IT sector was not recruiting as much as they ought to. It was not there to be. But this year, we've got some orders, data centers and such. And therefore in the domestic order inflow, nearly 40% has come from private sector orders. But in my sincere belief, this is a temporary phenomenon because much of the private sector's got very leveraged balance sheets, the kind of clients that we need to have. Now they have invested heavy in big assets over the last few years. They have to spread it out. Some of the private sector, which came up very fast, resulted in NCLT and such other matters right now [where] their assets are not moving forward. And the good money that is available with some of the better promoters are also going into buying some of these NCLT or such other assets that are available to them at prices which are bargain. Therefore, having said that, when money is at play in different matters I think it's difficult for the private sector to look at big ticket investments in the near short term. It's also a fact there are a few major matters yet to be resolved, the IBC cases, the ILFS matters, the Jet Airways turmoil right now, Dewan Housing and such, and all this is capital locked up. This could create issues because it's not a single capital locked up. It is multiple sources of capital which is locked up, and I have no idea what are the repercussions that could have. And therefore, having said that, I would be cautious for the next 9 months on the private sector coming into play on major capital investments. So we'll continue to depend on, predominantly on the central government and some of the more forward-looking state governments to do the capital investments. And even there, the capital investment would not be from their revenue collections, it would be multilateral or such funded projects, and therefore this will be with reasonable terms and in my opinion should be better projects.

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Pulkit Patni, Goldman Sachs Group Inc., Research Division - Equity Analyst [49]

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Sir, Pulkit Patni from Goldman Sachs. My question is related to the previous one, the fact that you don't expect private CapEx to pick up in a big way. We've seen last few years that PSUs have spent quite a lot of money. Now with all these buybacks, et cetera, they are not left with a lot to continue that kind of spend. Similarly, state governments don't have a very strong fiscal situation either. So I'm just trying to understand with the INR 1.8 lakh crore kind of order inflow expectation, it seems that we are expecting money to continue to flow in. So just wanted to get your thoughts as to who will be doing most of this expenditure?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [50]

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The simple way to answer your question is God. Having said that, what you said is the truth of the situation. And some fiscal discipline has also been lost during this election process also because many of the state governments have written off farmer loans and such other dues. Central government has also taken a shot at -- on coming out with a calibrated income scheme and such. And therefore, the country is going to see a tight fiscal situation. There's no doubt about it. And therefore, what -- as I clearly answered in the previous question, our main outlook is to look at capital, which has mainly multilateral funded or from multilateral funding sources. And therefore India predominantly will be multilateral funding sources. It is also possible that some of the projects which have been started cannot be stopped by the government. It's not that the government is out of money. They're in a tight fiscal situation. So they will have some money to come out with certain capital programs as already started like the Namami Gange and the river interlinking and road programs, the railway electrification, safety programs and such because these are of national necessity. You cannot do away with it. Some of the defense programs will see the light of the day, though it takes time. Therefore, our order inflow would be to continue to look at India. But as I said, we have taken this initiative going to Middle East, Africa and to certain parts of the Far East. And I also mentioned we're looking at CIS. So maybe we'll have to put in more efforts there to keep the adrenaline flowing.

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [51]

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Just to supplement, 2 perspectives. One is, I think the government will also actively look at monetizing its assets. The financial assets have been done by and large on a year-on-year basis. But the fiscal assets, the real hard assets are still pending. And government has lots of them. So there could be one way to generate liquidity, to recycle capital locked in, and that could be one way to do. Second is when they place out orders, it is not necessary, unlike a private sector project, that the financing gets tied up to the last penny to be spent. The money is to be spent over a 4-year period. And the government has also gotten lot smarter now to use the supply chain ecosystem also to finance. And we have spoken about it in the context of our working capital cycle. So if you take it in the context of the money is required over a 3-, 4-year period and will be spread between several balance sheets and not only state balance sheet, it does look feasible and to expect this kind of program to continue.

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Jayant Damodar Patil, Larsen & Toubro Limited - Senior EVP of Defence & Smart Technologies and Whole-Time Director [52]

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Can I add something? I mean, I think in addition to what S.N.S. and R.S.R said, it is also to be noted that, particularly in the oil and gas and hydrocarbon sector, there are new refineries coming up like the Grassroots Refinery, complete Grassroots Refinery by HPCL and Barmer. I mean, that tender packages are coming out. It's a massive development. That will happen because they will find money for that. Similarly, Gujarat is going with expansion. But there is undercapacity with the kind of growth we're seeing in population and economy. Those gaps have to be filled in. So they are very imperative that those things happen.

And another new dimension is that, that India growth story is kind of bought by many other neighboring countries, particularly you must have seen in Saudi Aramco and all, they're quite keen to come and invest. So that becomes an additional source of funding, in certain sectors at least, where they would come and bring the money, when the East West -- West coast refinery somebody spoke about. I mean, that is bringing a lot of foreign funding. So I think foreign funding could also become a source as the government gets formed and there is more confidence in the continuity of the government policies.

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Pulkit Patni, Goldman Sachs Group Inc., Research Division - Equity Analyst [53]

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Sure, sir. That's helpful. Sir, my second question is, similarly, when we are going to various geographies, particularly in Africa, et cetera, how are we ensuring that the payments there don't get stuck? We've had certain experiences a couple of years back, where we had issues in some projects. So just wanted to get your sense on how we get that comfort that these projects are going to pay up on time?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [54]

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See, we have a fairly decent risk and due diligence process, country evaluation and such within the organization. In Africa, if you see, beyond the oil and gas job, the SONATRACH job that we have got, which is a fairly rich organization there and practically is the economy of Algeria. The other jobs that you're looking at is all multilateral-funded jobs. There's hardly any direct government-funded jobs therein. Multilateral jobs are properly locked up and the government has got the money and the agency also monitors how the money is used up and such. And therefore, none of these projects we had any serious issues.

In Middle East today also, Aramco is a very well-funded organization. That is the economy of Saudi Arabia. In Kuwait, it is the oil companies, the K companies which play a big part. Power is essential. Therefore, we depend on the state electricity companies and such to take it forward from distribution and transformation point of view. If you look at all the other jobs that we are doing, it's either a very major national program, which is well supported by the government, or again which is funded by another country. For example, in Oman we go for jobs which are funded by bilateral assistance. For example, Kuwait is funding expansions in Oman or Saudi Arabia is funding expansions in Oman. We are not trying to take jobs directly from the government because we have serious payment problems on such jobs. So we have been prudent and careful. We evaluate as much as we can before we step onto it. And therefore rest assured that whatever we can do, we are trying to do, and we get information from multiple sources. We check with banks. We check their consultants. We check with all the other sources that is possible before we move forward. We also check with some of our peers in competition on how the payment and situations have been, and only then we move it. To that extent, we see -- we think we have done the due diligence that is required to take it forward. So gentlemen, if you have now bored of questions, we have bored of answers, unless there are some specific things. Yes?

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Ashwani Kumar, Nippon Life India Asset Management Limited - Senior Equity Fund Manager [55]

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This is Ashwani from Reliance Mutual Fund. My question was that international markets, you have out of INR 300,000 crores, you have something like INR 60-odd thousand crores worth of order book. In the international market, to compete against companies like VINCI or the Korean players or the Chinese players, what is the real opportunity for you? And what kind of capabilities you are building? Because in India, it is -- at the moment, it is constrained. And second, the base is also pretty big, although on the longer term, we are quite optimistic.

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [56]

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Tough questions you ask. I'll ask Sarma to answer this question.

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Subramanian Sarma, L&T Hydrocarbon Engineering Limited - MD, CEO and Director [57]

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Yes. I think if you look at the geographies we spoke about where we are present in the international market, I mean Africa, the competition is very different. It is not that intense. I mean, of course, Chinese are there, but there is a -- cake is -- wherever we are going, the cake is big enough to have -- for us to have a role. So we don't directly compete with Chinese. Wherever we are required to directly compete with Chinese, then we just let it go because I don't think we can beat the Chinese because they bring the financing. But there is still enough, particularly in Algeria, I mean Algeria is a very, very different level. It's a tough place to execute. But once you've done your homework and understand the market, then it is less competitive. So that's how we create the space there.

In Middle East, fortunately, I mean for us, I mean, the Koreans have not been very active for quite some time. I mean they haven't come back yet. They're trying. But the level of intensity with which they used to operate before, that has not seen yet. So it's -- we are basically competing with -- most of the projects, we are competing with, I think Europeans or a level playing field I would say, except Chinese. Chinese are there. You are right. But Chinese are also in very specific segment. They don't compete in all the spaces. So we have to be selective. And I think the market is big enough now for us to, to do that screening and be selective and compete in place where we have a level playing field.

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [58]

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Competency.

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Ashwani Kumar, Nippon Life India Asset Management Limited - Senior Equity Fund Manager [59]

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What is your win rate?

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Subramanian Sarma, L&T Hydrocarbon Engineering Limited - MD, CEO and Director [60]

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And the competency, see, the -- one, the main trend which we have to recognize and we have, I mean this is that all these countries, there is -- just like what we have in, make in India. All these countries, there are lot of emphasis on localization. Saudi has a big program called IKTVA, In-Kingdom Total Value Add. And then UAE also has started with ICV, In-Country Value, and things like that. Now -- and that requires a long-term presence. Now fortunately, for us, I mean as L&T Group we have been in the Middle East for a long time. So we have established some base. So that gives us a slight advantage in terms of trying to satisfy those requirements. I mean we need to do more to go up the value chain, but we have -- we're not starting from scratch, whereas somebody who's new entrant or Chinese are coming, Chinese have not been that active. So they will have to invest a lot to get to the same level as what we have already there today. So that's another aspect. But that becomes -- could become a barrier as the time goes because we'll have to strengthen our local presence. But we have a platform. So that gives us a little bit of a competitive advantage.

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [61]

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Just to supplement, just to supplement, I think on an analysis, I don't think we lack competency as an EPC player. What we need to possibly do to measure up to international standards is the ability to manage scale, the ability to take large projects and then execute. But fortunately for us, I think the world is also moving towards partnerships. And consortium are getting formed increasingly. Even the clients find it more safe in a relative sense to have consortium working for them so that you pitch in strengths of many organizations together. So this whole issue about competency mismatches between a company and us is getting leveled out because of all these approaches.

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Ashwani Kumar, Nippon Life India Asset Management Limited - Senior Equity Fund Manager [62]

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Just another thing, what would be your win rate, let's say, when you say in India, you are a very dominant player. But to, let's say, win INR 60,000 crores worth of orders from international market, how much would you bid for? And secondly, is defense a big opportunity for you to export products from here? Are you allowed to do so? And if yes, will it be a material sector to look at?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [63]

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Win rate, I will comment. And defense, maybe Mr. Patil can answer. Normally, international win rates are about 15%, and domestic win rates are about 25%, 26%. So on a blended basis, we find our win rates are about 20% or thereabouts on the defense exports.

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Jayant Damodar Patil, Larsen & Toubro Limited - Senior EVP of Defence & Smart Technologies and Whole-Time Director [64]

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In defense, we see the export markets actually building up. You're aware till 2017, there was nothing like defense export. It used to be only the peacekeeping force which is to be treated as export. We actually have full-fledged defense contracts outside. And that's one of the strategies we adopted as a market leader we need to be focusing. You saw out of the data that there's a sizable amount of order book, last year what we booked, 17% has come from international. You see that only growing and more and more opportunities are opening up. Then we have enormous amount of capabilities, which have been built in the country, and those are waiting to be taken out. We actually have warship orders outside today. We have orders for complete weapons systems outside the country today and it's a way to go. It's not offset business. It's direct exports.

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Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [65]

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I think we'll have to -- one last question.

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [66]

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There are a couple of more questions. Yes, please.

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Girish Achhipalia, Morgan Stanley, Research Division - VP [67]

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Sir, this is Girish again from Morgan Stanley. L&T-NxT initiative was launched in Q4. Just wanted to understand from a medium-term perspective, the capability that we are building through the organization, and what kind of medium-term growth outlook can you probably think about?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [68]

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See, we just started this initiative. This initiative started because we had undergone a major digital transformation or implementation and transformation within the organization. It concentrated on aspects like AI, analytics, IoT, geospatial, AR/VR and matters like that. These are highly specialized. These are not done by normal IT firms. And in my view, there is a huge demand for it in both the domestic and more predominantly in the international market. So you have started this within the company right now called L&T. NxT. J.D. Patil is leading this initiative. We are formulating our ideas on it as to the market and what would be the scope possible and how we should go about it and such. Give us some time. We'll come back to you with more details on the same. I feel it's got terrific long-term future and potential.

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Unidentified Analyst, [69]

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Yes. Just one bookkeeping question. Your cash flow numbers suggest that CapEx has been like INR 3,470 crores, which is significantly higher than last year FY '18. Could you throw some light on what was the Capex?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [70]

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See, the Hyderabad Metro project built up in a consolidated fashion, it becomes our CapEx. So much of the CapEx that you will see is on account of spend on the project.

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Unidentified Analyst, [71]

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So without Hyderabad Metro, what would be the normal CapEx?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [72]

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Normal CapEx would be about anywhere between 1,200 crores and INR 1,500 crores.

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Dhruvesh Shah;IDBI Federal Life Insurance;Analyst, [73]

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This is Dhruvesh from IDBI Federal Life Insurance. Sir, I just wanted to know from the media interactions or media releases, I understand that Gadkariji is personally in the favor of awarding the roads in the BOT format, and they are holding a meeting in the next 2 weeks with major road contractors in the country to understand their view. What is our view personally from the BOT perspective, since we have cash on our books, and HAM, we are personally not voting for?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [74]

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So the BOT chief of ours is sitting out here so to answer this question carefully. But I don't want to answer it directly. The answer is we are not any more interested in investing in BOT or HAM projects. We are withdrawing from this space. So we would be interested in EPC and such other projects. And therefore, having said that, that's the way we would look at it.

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Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [75]

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Thank all of you for a very patient and interactive session.