U.S. Markets close in 6 hrs 14 mins

Edited Transcript of LT.NSE earnings conference call or presentation 22-Jan-20 1:00pm GMT

Q3 2020 Larsen & Toubro Ltd Earnings Call

Mumbai Jan 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Larsen & Toubro Ltd earnings conference call or presentation Wednesday, January 22, 2020 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Arnob K. Mondal

Larsen & Toubro Limited - VP of Corporate Account & IR

* Harish Barai;Portfolio Manager

================================================================================

Conference Call Participants

================================================================================

* Abhishek Puri

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

* Aditya Bhartia

Investec Bank plc, Research Division - Analyst

* Aditya Mongia

Kotak Securities (Institutional Equities) - Research Analyst

* Ajinkya Dilip Bhat

Macquarie Research - Analyst

* Amish Shah

BofA Merrill Lynch, Research Division - Director

* Ashish Shah

Centrum Broking Limited, Research Division - Analyst of Infrastructure and Airlines

* Atul Tiwari

Citigroup Inc, Research Division - VP and Analyst

* Girish Achhipalia

Morgan Stanley, Research Division - VP

* Mohit Kumar

IDFC Securities Limited, Research Division - Analyst

* Pulkit Patni

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Puneet J. Gulati

HSBC, Research Division - Analyst

* Sumit Kishore

JP Morgan Chase & Co, Research Division - Research Analyst

* Varun Ginodia

AMBIT Capital Private Limited, Research Division - Research Analyst

* Venugopal Garre

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, good day, and welcome to the Larsen & Toubro Limited Q3 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Mr. Arnob Mondal. Thank you, and over to you, sir.

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [2]

--------------------------------------------------------------------------------

Good evening, everybody. A very warm welcome to our Q3 FY '20 earnings call. The format, as usual, will be that we will first walk you through our presentation, and hopefully, all of you would have downloaded the presentation. It was uploaded on our website just about an hour ago. After the presentation is over, we will open the session to question and answer. And today, I have my colleague, Mr. Harish Barai, who's part of our IR team, who will walk you through the presentation, and then he'll hand it over to me right at the end. Harish, over to you.

--------------------------------------------------------------------------------

Harish Barai;Portfolio Manager, [3]

--------------------------------------------------------------------------------

Yes. Good evening, ladies and gentlemen. A very warm welcome to all of you into the Q3 FY '20 earnings call. I will move on to Slide #2, which is Disclaimer. Essentially, this presentation contains certain forward-looking statements concerning L&T's future business prospects and business profitability, which are subject to a number of risks and uncertainties, and actual results could materially differ from those in such forward-looking statements. The remaining portion of the statement, I will take it as read and move on to the next slide, which is Slide #4, the performance highlights for Q3 FY '20.

For quarter 3 FY '20, our order inflow recorded a growth of 2% over the corresponding quarter of the previous year. Our order book at INR 3.06 trillion as on 31st December 2019, is up 9%. Our revenue for Q3 FY '20 is up 6% over the corresponding quarter of the previous year, and our EBITDA and PAT for the quarter is up 10% and 15%, respectively.

Now a couple of comments here. These numbers have to be seen in the context of the current domestic macroeconomic environment. It is important to note that despite strong macro headwinds, we have posted growth on all parameters. Despite deferrals in domestic awards in Q3, we have managed to grow our order inflows by 2%, largely led by growth in international orders. In fact, 43% of our Q3 order inflow is international.

Some comments on revenue. Despite carrying a large order book, we consciously slowed down execution to prevent working capital levels from rising further. Payments from the public space has not been very encouraging in Q3. Secondly, execution challenges arising out of nonmoving jobs, mainly in AP and coastal road, has also impacted our revenues for Q3.

With these comments, I will move on to my next slide on Key Financial Indicators, which is Slide #5. On Slide #5, quarterly numbers are mentioned on the left portion of the slide and the 9 monthly numbers are on your right. Since we have covered the quarterly numbers in the previous slide, in this slide, I will cover the 9 monthly numbers only.

Our order inflow for 9-month FY '20 is INR 1,286 billion, up 11%. Now if you splice the 9 monthly order inflow into quarters, you will realize that our Q1 order inflow growth was largely domestic, whereas our Q2 and Q3 order inflow growth is largely international. I also want to mention here that in the previous year, we had large orders like Expressway, Dhaka Metro and Coastal Road.

Moving on to revenues. Despite the domestic payment challenges and the fact that 5% of our order book was not moving during the 9-month period, we still achieved 9M FY '20 revenue growth of 10% at INR 1,012 billion. Our EBITDA and PAT for 9M FY '20 grows at 12% and 16%, respectively.

Coming to working capital. Our net working capital levels at 23.5% in Q3 FY '20 has largely remained at the same levels as Q2 FY '20 and Q1 FY '20. There has been no sequential worsening in working capital levels despite the payment challenges that I just mentioned. Our return on net worth on a trailing 12-month basis stood at 15.7%. All efforts are being put to achieve our ROE goal of 18% by FY '21.

With this, we will move on to our next slide, which is Slide #7, Q3/9M FY '20 Order Inflow/Order Book. Again, order inflow numbers are on your left and order book numbers are on your right. Growth in order inflow in Q3 and 9 month is largely driven by international business. In fact, you would observe that 43% of Q3 order inflows and 34% of 9M order inflow in the current financial year is international. Domestic prospects have witnessed deferral in award decisions in Q3.

Having said that, let me mention here that domestic project pipeline for Q4 is encouraging in a subdued environment. Our bottoms-up domestic project pipeline for Q4 is around INR 2.5 trillion.

Coming to order book. Yes, a strong order book provides good hedge against cyclicality. You will observe from the numbers that our international order book as a percentage of total order book has moved up from 20% in 9M FY '19 to 24% in 9M FY '20.

Today, we have 6 business verticals where order book ranges between 10% to 16% of the overall order book. They are Transportation Infra, Heavy Civil Infra, Power Transmission & Distribution, Water, Buildings & Factories and Hydrocarbons. Diversity of the order book helps and future revenue growth is not dependent on the fortunes of any single vertical.

With those comments, I will move on to Slide #8, which is Group Performance - Sales & Costs. In this slide, I will mainly be explaining the Q3 numbers as 9-month numbers are essentially a derivation. Our Q3 revenues at 362.4 billion, up 6%, is driven by Hydrocarbon and IT&TS business -- IT&TS businesses. Our manufacturing, construction and operating expense, or MCO, at INR 218.5 billion in Q3 is down 3%, reflecting cost savings in businesses. Finance charge OpEx for Q3 FY '20 at INR 20 billion is up 1%. Finance charge OpEx largely represents borrowing costs of the financial services business.

Our staff costs at INR 61.3 billion in Q3 FY '20, up 38%, is largely reflective of Mindtree consolidation and resource augmentation in our service businesses. Salary cost of over 21,000 minds of Mindtree is included in Q3, which largely explains the variation over the previous year. Total increase in staff costs in Q3 over the previous year is INR 16.8 billion, of which INR 12.5 billion pertains to Mindtree.

Coming to sales and administration. Our sales and administration expenses at INR 21.4 billion for Q3, up 14% over the previous year, largely on account of Mindtree consolidation and credit provisions. Consequently, our total OpEx at INR 321.3 billion for Q3 FY '20 is up 5% over the previous year.

With those comments, I will move on to the next slide, Group Performance - Profit Stack. Our EBITDA for Q3 FY '20 at INR 41.2 billion is up 10%. Our finance cost at INR 7.1 billion for Q3 FY '20 is up 33%. This is largely commensurate with group debt levels, reflective of the scale of operations as well as the phased commencement of Hyderabad Metro. Our borrowing cost at the parent level is around 7.5%, which is one of the lowest amongst corporates. Our parent company enjoys the highest credit rating in India.

Coming to depreciation. Our depreciation at INR 6.6 billion, up 63% in Q3, partly on account of Mindtree consolidation as well as depreciation on RoU assets, which have been capitalized after implementation of Ind AS 116 from 1st April 2019. Other income at INR 4.7 billion, down 19% in Q3, is reflective of lower short-term investments. Tax expense at INR 7.1 billion, down 37%, largely because of the lower tax rate announced by the government in Q2 of FY '20. JV PAT -- JV/S&A PAT share largely reflects IDPL assets, Forgings and Power JV performance -- Power JV's performance. NCI change in Q3 is mainly on account of Mindtree consolidation.

E&A business, which has been classified as discontinued operations, reports PAT of INR 1.9 billion for Q3 FY '20. Consequently, our reported PAT is INR 23.5 billion in Q3, up 15% Y-o-Y.

Moving on to the next slide, which is Slide #11, on Segment Composition. This slide on segment composition is essentially for reference purpose. E&A segment has already been classified as discontinued operations and consolidated at the PAT level. Information Technology mentioned within the IT&TS segment includes Mindtree as well.

Moving on to the next slide, which is Slide #12, on 9M FY '20 Order Inflow Composition. This slide is again for reference purposes. But as you can see, 48% of our order inflow in 9M FY '20 is from Infrastructures. If you would recollect, in H1 FY '20, our Infrastructure orders as a percentage of total order inflows was 38%, essentially means that our Q3 FY '20 order inflows have largely been powered by Infra.

Moving on to the split between domestic and international. 66% of our 9M FY '20 order inflows is domestic. If you would recall in H1 FY '20, our domestic orders as a percentage of total order inflows was 70%, essentially means that our Q3 order inflows have largely been powered by international orders.

With those comments, I will move on to the next slide, which is Slide #13, 9M FY '20 Order Book Composition. As you can see, 88% of our order book of INR 3.06 trillion is dominated by Infrastructure and Hydrocarbon. Within Infrastructure, again, our order book is very well diversified across 5 large sub-verticals, be it Water, Buildings & Factories, Heavy Civil Infra, Transportation Infra and Power Transmission & Distribution. We are predominantly an India-centric company, and therefore 76% of the total order book is India-based.

Over the last couple of years, we have tried to consciously move away from the Middle East. These efforts have borne fruit and about 46% of our international order book is non-Middle East.

With those comments, I will move on to Slide #14, 9M FY '20 Revenue Composition. This slide is again for reference purpose, and there are no major observations in this slide, except that 47% and 30% of our revenues in 9-month FY '20 is from Infra and service businesses, respectively. Secondly, 66% of our 9M FY '20 revenues is domestic. Within international, for 9M FY '20, about 41% of our revenues is Middle East.

We move on to Slide #15 on the Infrastructure segment. Infrastructure segment, as you are aware, is the largest segment within the group. And obviously, the financial fortunes of this segment significantly impacts the group performance.

Quick comment on order inflows before we move on to other parameters. After a muted Q1 and Q2, in Q3, we have registered significant increase in infra order inflows, largely driven by international orders. 41% of total infra order inflows in Q3 FY '20 was international. Domestic ordering environment in Q3 was lackluster, and we have witnessed multiple deferment of orders. Having said that, we are optimistic on the domestic ordering environment in Q4 FY '20. We see total bottoms-up domestic infra prospects of INR 2.5 trillion in Q4 FY '20, which should auger well for Infra.

Moving on to revenues. Muted revenues in Q3 is arising out of execution challenges and the need to preserve working capital levels in a constrained payment environment.

Coming to margins. Q3 FY '20 infra margins at 6.1%, up 70 basis points over the previous year, and 9M FY '20 infra margins at 6.5%, up 20 basis points over the previous year, largely reflective of stage of execution and job mix.

With those comments, I will move on to Slide #16, which is on the Power Segment. Quick comment on order inflows before I move on to other parameters. Strong order inflow in the current year replenishes the order book and provides a very healthy revenue visibility for the coming quarters.

Coming to revenues. Q3 FY '20 revenues at INR 6.9 billion, down 23% over the previous year, largely reflective of depleted opening order book and tapering of international jobs. Margins for Q3 FY '20 is 3.4%, up 50 basis points over the previous year, whereas margins for 9M FY '20 at 3.6% is down 80 basis points. Margins are reflective of job mix and stage of execution.

For the Power business, margins appear optically low because MHPS, boiler and turbine and other power JV companies are consolidated at the PAT level under the equity method.

With those comments, I will move on to my next segment, which is Heavy Engineering segment. Quick comment on order inflows. Again, before we move on to other financial parameters, this segment had robust order inflows in the previous financial year. Current year FY '20 order inflows have been impacted by multiple award deferments. However, that, again, would be, to some extent, dependent upon the economic cycles of the global oil and gas industry. Revenue growth of 20% at INR 7.2 billion in Q3 FY '20 is largely a reflection of the open order book. Margins in Q3 FY '20 at 23.5%, up 300 basis points over the previous year. This business yields strong margins in excess of 20% because heavy manufacturing business is essentially capital-intensive. EBITDA margins tend to be higher to cover for depreciation and interest costs as well. Apart from that, the global competence, technology differentiation, proven track record and cost efficiencies yield strong margins for this business.

We'll move on to our next segment, which is the Defense Engineering segment. Government has been articulating the need to involve the private sector in defense for a long time, but little progress seems to have happened on the ground. Consequently, large order inflows are missing and order inflows in the current financial year comprised of multiple small value orders. Execution of tracked artillery gun order continues to drive revenue growth and margins for this business. Margins, again, reflects stage of execution, job mix and operational efficiencies.

We'll move on to Slide #19, Hydrocarbon segment. Hydrocarbon segment has been doing very well. And today, there is unexecuted order book of close to 3 years of revenue. Hydrocarbon business had significant order wins in the current financial year, both from domestic and international market.

Strong revenue growth of 17% in Q3 FY '20 at INR 43.9 billion is the consequence of large opening order book and better progress in the onshore and offshore jobs. Q3 FY '20 margins at 12.1%, up 390 basis points over the previous year, largely on account of efficient execution, job mix and cost savings in certain jobs. One needs to note that this business runs on low capital employed and consequently generates abnormally high ROCE.

We'll move on to the next segment, which is the Development Projects segment. Development Projects comprised of Power Development business and Hyderabad Metro. In the previous year, this segment included Kattupalli Port as well. You would recollect that we sold off Kattupalli Port last year. As you can see, the Q3 revenue of this segment at INR 12.4 billion, up 4%, is largely contributed by Power Development business. Power Development revenues comprise of Nabha Power, which is a 1,400-megawatt power plant in Punjab. As far as Hyderabad Metro is concerned, we have already commissioned 57 kilometers. The remaining portion should get completed in Q4 FY '20. Margin profile of this business segment is still emerging, primarily because the final outcomes will depend on various claims that we have filed in respect of Metro and Nabha Power. We will be able to guide you better in the coming quarters on margins. Here again, roads and transmission lines are consolidated at the PAT level under the equity method.

Moving on to the next slide, which is the IT and Technology Services segment. Revenues of IT and Technology Services segment for Q3 FY '20 at INR 60.9 billion is up 65% over the previous year, primarily because of Mindtree consolidation from Q2 FY '20 onwards. However, it is important to note that all the 3 listed subsidiaries have posted healthy Q3 revenue growth in an otherwise seasonally weak quarter. LTI revenue growth is led by manufacturing, energy and utilities and CPG, retail and pharma. LTTS revenue growth is led by medical devices, plant engineering and transportation verticals. Mindtree revenue growth is led by high tech and media and travel and hospitality. Margin variation is an outcome of increased resource cost, which is an industry-wide phenomenon, primarily because of the pressure of localization in developed countries, particularly U.S.A. Jump in visa costs also contributed to margin variation. However, it is important to note that Q-on-Q margin profile of all these 3 companies reflect an encouraging trend.

With those comments, I will move on to my next slide, which is the Others segment. Others segment comprises of construction and mining equipment, rubber processing machinery, industrial valves and realty business. Q3 FY '20 revenues of this other segment at INR 12.5 billion registers degrowth of 22%, primarily because previous year revenue included a lumpy sale of commercial premises in our realty business. Higher previous year margins is also due to the sale. In realty business, let me mention here that we have seen improved traction in sales of reasonably priced residential apartments.

Coming to other businesses, our construction and mining equipment, rubber processing machinery and industrial walls have registered quarterly revenue growth rates of 1%, 27% and 74%, respectively, over the corresponding quarter of the previous year.

With those comments, I will move on to the next slide, which is on L&T Finance Holdings Group. L&T Finance Holdings, again, a listed company and they had their earnings call as well. All the numbers in detail are available in public domain. Our company has demonstrated tremendous resilience despite challenges facing the NBFC space. Company enjoys the highest credit rating in India and continues to focus on various initiatives starting from prudent and smart lending to focus on asset quality, generating robust NIMs and fees income, maintaining prudent ALM, diversifying the fund sources and retailization of loan book over time; in fact, retailization of both the loan and the borrowing book over time.

Without going into numbers mentioned above, let me mention here that 9M FY '20 PAT degrowth of 26% is mainly on account of onetime impact arising out of DTA restatement, post opting for a lower tax rate in the new regime.

I will move on to the next slide, which is the Electrical & Automation segment. As mentioned earlier, E&A business has been classified as discontinued operations in FY '19, '20. PAT of E&A business is being aggregated as a separate line item in our profit and loss statement. Revenue for Q3 FY '20 at INR 13.3 billion, down 10% over the previous year, largely reflective of the softer demand environment. Better margins in Q3 FY '20 over Q3 FY '19 is largely reflective of the operational efficiencies and other cost optimization measures.

We will move on to our next slide on environment and outlook. I will request my senior colleague, Mr. Arnob Mondal, to run you through the same, post which we open up for Q&A. Thank you.

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [4]

--------------------------------------------------------------------------------

Thank you, Harish. Harish has already covered a fair bit of ground as far as the environment is concerned, but I'll still touch upon a few points in the buildup to giving you some idea of how we see things panning out in the remaining quarters of the year.

The environment is no doubt difficult, and we are in the midst of a slowdown. But we feel that our economic moat with a strong balance sheet, large order book, diverse business portfolio, our capability, execution track record still provides an economic moat for us, which enables us to ride out short-term economic cycles. As far as the lifeblood of our project business is concerned, which is ordering, we are still in a -- it is still a bit volatile in terms of timing -- it's uncertain in terms of timing, but the prospect base is still fairly decent. Ordering today is still largely public sector driven because private sector is still very, very muted. And as Harish said, we have seen -- it is being driven by -- largely being driven by international for the first 9 months. We've had some -- had a bit of a mixed quarter. We've won some awards, we've lost some awards, but that's all part and parcel of our business model, which happens every year, and there's nothing much different. But considering that the prospect base is different, it is still decent and assuming that not much deferral of our decisions takes place because many of our customers usually tend to order out, they complete their budgets in the end of the year, we expect to be in the band of 10% to 12% organic growth as originally guided to markets.

Coming to revenues. This has been a -- Q3 was a -- has been a bit of a watershed and difficult quarter, where we've had to balance political and economic -- political economic environment -- execution environment, headwinds, along with sluggish payment scenario at times from clients. We've had -- we feel the need to preserve our balance sheet health and [not] working capital levels [below] unacceptable levels. And also significantly, we are also significantly affected by the AP embargo and project execution since sometime in Q1 of this financial year. The -- I think everybody knows that the Mumbai Coastal Road, which is a large project, was also stopped by a high court order execution or stopped by a high court order since early April this year. So the whole of 9 months is something that we've lost revenues. And we've also seen stoppage of all construction activity in the national capital region during on better part of Q3 due to high pollution levels. So all these 3 together have also impacted our revenues. And our domestic Infra segment has been at the receiving end of all these forces. They've had to pull back on execution. And consequently, the Infra segment has raised the degrowth in revenues in Q3. The current status is the coastal road has again commenced in full swing. So Q4 should see better traction on that front. The AP, Andhra Pradesh issue is getting resolved. And we think that some revenues should start accruing sometime in Q4 as well. And of course, NCR region embargo is no longer there.

It would also not be out of place to mention that a large number of projects faced some execution impediments such as, I already mentioned, the political headwinds. There are also some cases where the paucity of funds, there were some delayed client clearances, which could be linked to paucity of funds. And of course, in a few cases, work-front availability was stuck. But be that as it may, we see still committed to preserving the quality of our balance sheet. And coupled with the normal trends of urgency by clients to utilize cash flow budgets in Q4 -- by the end of Q4 rather, we expect Q4 to be a better quarter on the execution front. The concerns and pullbacks in areas of AP, Maharashtra, NCR region have also receded. And hence, we estimate that we will end the year within the band of 12% to 15% growth in revenues as was originally guided by us in the beginning of this fiscal.

Margins. We had guided for stable margins for our businesses, excluding services business. And margins in almost all businesses have shown a very welcome buoyancy. To some extent, tapering of FY '19, some losses on Transportation Infra has also been responsible. And however, last year, Q3, we had a lumpy EBITDA gain in excess of INR 550 crores from a sale of commercial property, and we are happy to note that in spite of that gain not having -- in spite of such a lumpy gain not having materialized in the current quarter Q3, our EBITDA margins have still inched up a bit. And considering the expected Q4 seasonality in job mix, we, again, expect to end the year within our guidance of stable margins for our services business.

With that, I'd like to hand the session over to question and answer.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from the line of Mohit Kumar from IDFC Securities.

--------------------------------------------------------------------------------

Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [2]

--------------------------------------------------------------------------------

Congratulations on good order inflow. Sir, my question primarily is the guidance to maintain for the order inflow, given the fact that the Q4 -- Q3, there were a lot of deferral. How confident you are of maintaining this order inflow, meeting this order inflow guidance at the lower end? Secondly is that can you just comment on the international order pipeline, which we are targeting?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [3]

--------------------------------------------------------------------------------

Actually, the prospect base is still fairly recent. It goes to something close to INR 3 lakh crores. And Harish also mentioned that around INR 2 lakh 50,000 crores approximately is domestic and around close to INR 50,000 crores is international, largely centered around Power Transmission & Distribution, some water projects, some Transportation Infra and Hydrocarbon. That's the international. These are the areas that we are typically targeting.

Now considering the fact that our ask for Q4 to meet the lower end of the guidance is slightly less than INR 60,000 crores, of which close to, you can say, around INR 50,000 crores -- INR 49,000 crores would be the ask for our project business, so on a prospect base of close to INR 3 lakh crores, it seems reasonably achievable.

Assuming that the prospects that we see today do not get converted to awards during the course of this quarter and don't get repeatedly referred. But as I mentioned earlier, typically, clients are in a hurry to -- usually, we have seen that in Q4, clients do tend to order out, especially to meet their commitments -- budgeted commitments. So that gives us some element of confidence in being able to achieve our guided order inflow.

--------------------------------------------------------------------------------

Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [4]

--------------------------------------------------------------------------------

Sir, are there any large order which you are targeting, which may be a large component of the domestic order basket?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [5]

--------------------------------------------------------------------------------

Only 2 coal-fired power plants are there. But apart from that, nothing very much. All the others are relatively small. There are no really blockbuster orders that we are targeting as such.

If we are lucky, the one package of the high-speed rail could get ordered out, but that would be touch and go.

--------------------------------------------------------------------------------

Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [6]

--------------------------------------------------------------------------------

Has the working capital stress reduced in the Q3 compared to Q2 -- compared to the end of H2? And how do you see it panning out in the rest of the year currently?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [7]

--------------------------------------------------------------------------------

No. No. It has remained in the 23% to 23.5% sales level. However, I also mentioned that usually, we find that Q4 is a decent quarter in the sense that customers tend to pay fast to exhaust their payment commitments as far as their budgets are concerned. At the same time, that enables us to ramp up execution without receivables ballooning. And when I say ramp up execution, it means that we -- we've procured more material. We hire a larger labor force. We hire plant and machinery and expand inputs on our projects. And all of those, typically, we get some credit from vendors. So vendor credit also tends to increase. So working capital levels tend to go down in Q4. But to some extent, that will also depend upon whether customers keep on paying fairly strongly in the last quarter of the year as they have been doing every year in the last quarter.

--------------------------------------------------------------------------------

Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [8]

--------------------------------------------------------------------------------

The last question on the Hyderabad Metro. So I believe that this is the quarter where we will complete the entire -- commission the entire Hyderabad Metro. And given the fact that we have taken approval for monetization of 1.2 million square feet, is it possible to share the -- what is the progress on the monetization front?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [9]

--------------------------------------------------------------------------------

We are not -- we have not really envisaged any monetization just now as such. We are -- it's always on our radar, of course, but the fact is that we are more focused on operationalizing the metro, after which we will look at TOD. You may be aware that this project has 18.5 million square feet of Transit Oriented Development to be had. And we have barely touched the tip of the iceberg as far as that is concerned, primarily because we have been focused on operationalizing the metro. So let us operationalize that and then we look to see whether we can ramp up the TOD part of it.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

The next question is from the line of Venugopal Garre from Bernstein.

--------------------------------------------------------------------------------

Venugopal Garre, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [11]

--------------------------------------------------------------------------------

Congratulations. I would say congrats a lot, especially given the fact that orders were good and the guidance seems to be pretty much intact. I just wanted to probe a couple of things on that.

Number one is the deferment of orders that you highlighted in Q3 especially, was there a common element to it? Was there a common driver that you would have seen for the deferment for those orders? Is it largely paucity of funds which was driving that? Or was it like little activity from the government in getting those approvals for these projects? What is it that was the major driver for deferment?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [12]

--------------------------------------------------------------------------------

So usually, clients don't tell you exactly why they are deferring it. You just say -- we -- you just have to wait and watch. So Venu, I'm sorry, I will not be able to give you any more granular color on this aspect of the deferment. But it's something that we have seen happening, particularly in this quarter.

--------------------------------------------------------------------------------

Venugopal Garre, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [13]

--------------------------------------------------------------------------------

Okay. 2 other small things, Marastra, excluding the Coastal order, which you mentioned. Was there anything which was stalled post the change of government there? Or this was only order, which was sort of -- because this was -- this order had some other issue, but was there anything stalled there?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [14]

--------------------------------------------------------------------------------

Yes. We have been doing some very large marquee orders. And actually, we -- we're practically slowed down significantly for around a month until better clarity emerge because the initial statements that emanated from the new government were not very encouraging. However, they had quickly toned down the rhetoric. So while, yes, we did miss some revenues, but it was not for a very prolonged period of time. It's quickly resumed back to normal.

--------------------------------------------------------------------------------

Unidentified Company Representative, [15]

--------------------------------------------------------------------------------

Our projects (inaudible)

--------------------------------------------------------------------------------

Venugopal Garre, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [16]

--------------------------------------------------------------------------------

Got it. My last question is this is -- this news flow on Nabha, which was a bit confusing with regards to FGD implementation not having been done. The new project was -- it was not getting -- it is not generating power and then there was some issue on the notice from the Punjab power and then it restarted again. So what is the challenge there as of now in terms of status? Is this something that we should track?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [17]

--------------------------------------------------------------------------------

The challenge was that we had represented for extension of time to multiple authorities. In fact, Ministry of Power had also recommended our case. Punjab Pollution Control Board had also endorsed recommendation for extension of time. Unfortunately, the Central Pollution Control Board did not take any action, and the deadline was 31st of December. So to actually make a point, we shut down our plants on 31st of December. But again, based upon advice from regulatory authorities, we again restarted within a few days. So expecting that, yes, we should get some extension of time for this.

--------------------------------------------------------------------------------

Venugopal Garre, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [18]

--------------------------------------------------------------------------------

Okay. So the implementation is going on, the FGD one, which is...

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [19]

--------------------------------------------------------------------------------

Yes. The implementation is going on.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

The next question is from the line of Abhishek Puri from Axis Capital.

--------------------------------------------------------------------------------

Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [21]

--------------------------------------------------------------------------------

Congratulations on good set of performance in the challenging market. My 2 questions here on -- first, I think you've mentioned in the press release that there is some variation claims settled in the infra and the hydrocarbon segment. How big would they be? And could you spell that out?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [22]

--------------------------------------------------------------------------------

Actually, we don't specifically talk about that thing. But in Q2, we got a hydrocarbon -- we did get a very large claim, around INR 70, 80 crores in Q2.

--------------------------------------------------------------------------------

Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [23]

--------------------------------------------------------------------------------

Right. But in Q3 also, is there an amount? Because it's mentioned as per the quarter, I think, in the statement.

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [24]

--------------------------------------------------------------------------------

We also got some claims.

--------------------------------------------------------------------------------

Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [25]

--------------------------------------------------------------------------------

Okay. Would it be something similar? Last time, it was about INR 70 crores, if I remember correctly.

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [26]

--------------------------------------------------------------------------------

So I think we'll take that question offline.

--------------------------------------------------------------------------------

Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [27]

--------------------------------------------------------------------------------

Okay. Right. So second, in terms of working capital, how is the mix now? I think last time when we discussed on this, the receivables were down, and the working capital deterioration was only due to the vendor support that you had given. So how is the mix in Q3 now?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [28]

--------------------------------------------------------------------------------

It's still the same. In fact, receivables, along with retention together, is down maybe by a few hundred crores or so in absolute terms. But payables has still not moved up. So the mix is pretty much the same.

--------------------------------------------------------------------------------

Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [29]

--------------------------------------------------------------------------------

Okay. The liquidity situation has not really helped or improved?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [30]

--------------------------------------------------------------------------------

No. Not yet.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And the level specifically?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [32]

--------------------------------------------------------------------------------

If you track credit growth, you will see that credit growth has been tapering downwards.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Right. Okay. And lastly, sir, the projects in Andhra, I mean, you did mention that some of the revenue could come back in Q4. Can you spell out which projects can come back out of this INR 14,000, 15,000 crores order inflow that we have from there if any settlement has been done?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [34]

--------------------------------------------------------------------------------

Actually, we don't -- I'm sorry to disappoint you, Abhishek, but we don't discuss project-specific details. Suffice to say that it is getting resolved and it's on the verge of restarting again.

--------------------------------------------------------------------------------

Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [35]

--------------------------------------------------------------------------------

So can we safely say about 50% of this has been resolved? Or it will be more or less than that?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [36]

--------------------------------------------------------------------------------

Any number, but a large part of it has been resolved.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

The next question is from the line of Sumit Kishore from JPMorgan.

--------------------------------------------------------------------------------

Sumit Kishore, JP Morgan Chase & Co, Research Division - Research Analyst [38]

--------------------------------------------------------------------------------

The overseas infra order inflow performance was particularly pleasant to know. So could you give us some color on the geographies sector and the customer profile of the international orders that you booked in third quarter?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [39]

--------------------------------------------------------------------------------

Sumit, since we have not given out specific press releases, in the absence of customer approval, we will not be able to spell out these details that you are asking.

--------------------------------------------------------------------------------

Sumit Kishore, JP Morgan Chase & Co, Research Division - Research Analyst [40]

--------------------------------------------------------------------------------

But broadly, these are from which geographies? Is the nature of the project more than INR 30 billion, INR 40 billion of orders?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [41]

--------------------------------------------------------------------------------

Africa, Middle East typically, the geographies where we are seeing some traction in infra.

--------------------------------------------------------------------------------

Sumit Kishore, JP Morgan Chase & Co, Research Division - Research Analyst [42]

--------------------------------------------------------------------------------

And these are government contracts?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [43]

--------------------------------------------------------------------------------

Sumit, please, I'll have to disappoint you, but whichever way you ask your question, my answer is still going to have to be the same.

--------------------------------------------------------------------------------

Sumit Kishore, JP Morgan Chase & Co, Research Division - Research Analyst [44]

--------------------------------------------------------------------------------

Sure. Very briefly, a follow-up on the previous question. When certain portions like in AP are getting resolved, is there an indication towards the Amravati contracts also, given we were reading that they are possibly going to have 3 capitals, the legislative, executive and judicial capital? Amravati...

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [45]

--------------------------------------------------------------------------------

[Amravati] may happen, but yes. It's been resolved in a holistic manner, not just a few projects here and there.

--------------------------------------------------------------------------------

Sumit Kishore, JP Morgan Chase & Co, Research Division - Research Analyst [46]

--------------------------------------------------------------------------------

Okay. And finally, on Hyderabad Metro, could you please give us the third quarter EBITDA interest, depreciation and profit For Hyderabad Metro?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [47]

--------------------------------------------------------------------------------

On a turnover of around INR 225 crores approximately. We got EBITDA slightly less than INR 100 crores and the PAT -- negative PAT of around INR 45 crores, approximately.

--------------------------------------------------------------------------------

Sumit Kishore, JP Morgan Chase & Co, Research Division - Research Analyst [48]

--------------------------------------------------------------------------------

Okay. So the interest cost was how much? Because that is a key number.

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [49]

--------------------------------------------------------------------------------

I will give you better clarity when we commission the full project sometime in Q4.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

The next question is from the line of Aditya Bhartia from Investec.

--------------------------------------------------------------------------------

Aditya Bhartia, Investec Bank plc, Research Division - Analyst [51]

--------------------------------------------------------------------------------

Arnob, my first question is on the execution pace, wherein you experienced optimism around fourth quarter. Now given the fiscal scenario of the government and given that allocations to some of the ministries is also getting curtailed, isn't there a risk that some of the trends that we saw in third quarter may persist in fourth quarter as well, essentially, that unless you are willing to relax working capital terms, execution may remain challenged?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [52]

--------------------------------------------------------------------------------

Aditya, that risk is always there, but I don't see anything different from what we have seen in earlier years as well. The same question keeps on rising in earlier years as well, that if the government reaches its fiscal deficit, will it pull back payments and hence, will your execution get delayed? And this is a standard question which we are asked in the beginning of Q4 every year. So the risk is always there, but we are hopeful that it won't play out in a full blown manner.

--------------------------------------------------------------------------------

Aditya Bhartia, Investec Bank plc, Research Division - Analyst [53]

--------------------------------------------------------------------------------

Okay. Okay. And my second question, I just want to get a sense about how important is the operating leverage impact in our business? Wherein because our infra revenues have been so weak in this particular quarter. Do you think that has also impacted our margins on the interest rate, in a sense, margins could have been a lot better had some of the orders gotten executed?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [54]

--------------------------------------------------------------------------------

See, some element of operating leverage is -- does play out. But those typically tend to be more transient. In fact, people keep on asking me is that infra, if it keeps on growing, shouldn't you see a significant bump up in margins? But the fact is that the operating leverage -- the leverage gains tend to be transient because the moment people see increase in margins, the natural tendency of business is to become more competitive in bidding. So it tends to wither out after some time. So it works both ways.

--------------------------------------------------------------------------------

Aditya Bhartia, Investec Bank plc, Research Division - Analyst [55]

--------------------------------------------------------------------------------

Like, especially in this particular quarter, wherein you may have appointed some subcontractors. You may be having some equipment on lease, and some of those contracts did not get executed. So will there be a charge on some of those orders wherein execution has been moving slow?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [56]

--------------------------------------------------------------------------------

Aditya, you must appreciate that we can't completely dissect every part of our margin and explain it. In any case, quarterly numbers are not -- usually not reflective of either full year or steady-state margins going forward. So I suggest you don't go down that path and don't extrapolate quarterly margins into steady-state levels.

--------------------------------------------------------------------------------

Aditya Bhartia, Investec Bank plc, Research Division - Analyst [57]

--------------------------------------------------------------------------------

Sure. And lastly, I just wanted to understand if there's been any traction in the defense sector? And we obviously read about this article on submarines. Anything that's happening over there? And what's your expectation?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [58]

--------------------------------------------------------------------------------

So it depends. That is -- what you read this morning was obviously a very positive development. But that's just one step in the journey towards finally getting it ordered out under the strategic partner program. But it's a very long drawn out process, and I don't expect anything to happen in the short term. It's unlikely that anything will happen immediately. Defence procedures are very, very lengthy. And we have to go through many procedures, which typically are not there in other parts of our business. So time lines can be very, very elongated on this.

--------------------------------------------------------------------------------

Aditya Bhartia, Investec Bank plc, Research Division - Analyst [59]

--------------------------------------------------------------------------------

But sir, could this order get placed next year in FY '21? Or do you think it will go down -- I mean, in FY '22 or '23?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [60]

--------------------------------------------------------------------------------

Aditya, I would not care to even speculate on that, please.

--------------------------------------------------------------------------------

Operator [61]

--------------------------------------------------------------------------------

The next question is from the line of Ashish Shah from Centrum Broking.

--------------------------------------------------------------------------------

Ashish Shah, Centrum Broking Limited, Research Division - Analyst of Infrastructure and Airlines [62]

--------------------------------------------------------------------------------

Sir, you mentioned about some possibility of HSR 1 package coming within Q4. Now that's a little surprising given the stand that the new government has taken in Maharashtra. So anything you could elaborate on that?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [63]

--------------------------------------------------------------------------------

No. It's just that the bid commission and steps like that are progressing a bit. It has not come to a complete standstill.

--------------------------------------------------------------------------------

Ashish Shah, Centrum Broking Limited, Research Division - Analyst of Infrastructure and Airlines [64]

--------------------------------------------------------------------------------

Okay. So you're saying that process still goes on?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

That process is going on, whether it will actually get ordered out, time lines of that are still a bit uncertain.

--------------------------------------------------------------------------------

Ashish Shah, Centrum Broking Limited, Research Division - Analyst of Infrastructure and Airlines [66]

--------------------------------------------------------------------------------

Sure. Fine. Sir, we -- in the cash flow, we see a net investment or purchase of investment about INR 1,140 crores. So that would be towards the Metro, Hyderabad Metro? Or there's some other investment that were made?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [67]

--------------------------------------------------------------------------------

Hyderabad Metro would come on that -- see, it's mainly on financial services business.

--------------------------------------------------------------------------------

Ashish Shah, Centrum Broking Limited, Research Division - Analyst of Infrastructure and Airlines [68]

--------------------------------------------------------------------------------

Okay. That's on the financial services?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [69]

--------------------------------------------------------------------------------

Hyderabad Metro investment, it will fall under the investment because it's 100% subsidiary of L&T and hence, there's a line-by-line consolidation. So the CapEx we have consolidated under investment in fixed assets.

--------------------------------------------------------------------------------

Ashish Shah, Centrum Broking Limited, Research Division - Analyst of Infrastructure and Airlines [70]

--------------------------------------------------------------------------------

Sure. So it wouldn't reflect here, actually. All right. So this INR 1,140 crores that we see here is on the financing business?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [71]

--------------------------------------------------------------------------------

Well, largely that.

--------------------------------------------------------------------------------

Ashish Shah, Centrum Broking Limited, Research Division - Analyst of Infrastructure and Airlines [72]

--------------------------------------------------------------------------------

Okay. And maybe I'll take it off-line. Also, any impact of ForEx mark-to-market loss or gain during the quarter?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [73]

--------------------------------------------------------------------------------

During the quarter, there is -- some impact is there. And -- but it's not -- for the quarter, there is a bit of a variation between Q3 of this year and Q3 of last year. As far as ForEx is concerned, we've had a gain of around INR 100 crores this year against a loss of around -- a gain around INR 30 crores last year in this quarter.

--------------------------------------------------------------------------------

Ashish Shah, Centrum Broking Limited, Research Division - Analyst of Infrastructure and Airlines [74]

--------------------------------------------------------------------------------

Okay. So Q3 has a gain of about INR 100 crores?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Ashish Shah, Centrum Broking Limited, Research Division - Analyst of Infrastructure and Airlines [76]

--------------------------------------------------------------------------------

Okay. Sure. And that would be part of the other expenses? I mean the expenses would be lower to that extent?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [77]

--------------------------------------------------------------------------------

Yes. Sales and admin expenses.

--------------------------------------------------------------------------------

Operator [78]

--------------------------------------------------------------------------------

The next question is from the line of Girish Achhipalia from Morgan Stanley.

--------------------------------------------------------------------------------

Girish Achhipalia, Morgan Stanley, Research Division - VP [79]

--------------------------------------------------------------------------------

Just the 3 states that you mentioned and now those issues are receding, had these issues not commenced in Q3? Any ballpark number how much revenue would you have lost because of this different situations spanning out in different states?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [80]

--------------------------------------------------------------------------------

As far as these 3 issues are concerned, we have lost around INR 2,500 crores to INR 3,000 crores of revenue in Q3.

--------------------------------------------------------------------------------

Girish Achhipalia, Morgan Stanley, Research Division - VP [81]

--------------------------------------------------------------------------------

Okay. Sir, just in terms of the process, not the time line or anything, for the different strategic partnership program. Because there are 2 vendors, which is yourself and Mazagon Dock, which the media is quoting now. The steps now would be that you would partner with the foreign collaborator, and then 1 of the 2 would finally be given the bid contract? So how would it flow through now from here on?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [82]

--------------------------------------------------------------------------------

I will get back to you on that. But suffice to say that I would suggest you don't assume anything happening in a hurry. I'll have to get back to you.

--------------------------------------------------------------------------------

Girish Achhipalia, Morgan Stanley, Research Division - VP [83]

--------------------------------------------------------------------------------

Sure, sir. I just want to understand the process. Okay. Okay. And the final thing is, sir, if I look at the concession slide, you updated the balance equity or commitments across ICD, VGF at INR 12 billion, which I presume in the last quarter was about INR 6 billion. So this incremental money, is it -- is that for Hyderabad Metro or certain specific projects?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [84]

--------------------------------------------------------------------------------

It is for Hyderabad Metro.

--------------------------------------------------------------------------------

Operator [85]

--------------------------------------------------------------------------------

The next question is from the line of Puneet Gulati from HSBC.

--------------------------------------------------------------------------------

Puneet J. Gulati, HSBC, Research Division - Analyst [86]

--------------------------------------------------------------------------------

I have just -- if you can give a little more color on the payment outstanding side, are you seeing these different payments more from government departments, PSUs or some private entities as well?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [87]

--------------------------------------------------------------------------------

So see, private sector now is less than 20% of our total order book -- it's [20%] of the domestic order book. So you see, most of the payment stress is coming from public sector.

--------------------------------------------------------------------------------

Puneet J. Gulati, HSBC, Research Division - Analyst [88]

--------------------------------------------------------------------------------

So public sector enterprises or government department?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [89]

--------------------------------------------------------------------------------

Actually, combination of central, state and PSUs, all 3. [Sluggish, I mean]

--------------------------------------------------------------------------------

Puneet J. Gulati, HSBC, Research Division - Analyst [90]

--------------------------------------------------------------------------------

Okay. So but what gives you confidence that this will come back given that Q4, there are also project constraints from the central and the state government side?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [91]

--------------------------------------------------------------------------------

Puneet, I think somebody else asked this question. I think Venugopal asked this question already. There's no certainty on this, but we have also seen a similar situation happening year after year. In fact, for the last few years, the economy has not been in -- not been firing on all 4 cylinders. And the same stress has been seen in earlier years, and it seems to get alleviated in Q4.

--------------------------------------------------------------------------------

Puneet J. Gulati, HSBC, Research Division - Analyst [92]

--------------------------------------------------------------------------------

Okay. Okay. Great. Secondly, on the E&A business, any clarity on when do you expect to receive money?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [93]

--------------------------------------------------------------------------------

See that we really are having to go through various statutory formalities, including transfer of land and building, renovation of a huge number of contracts to the new entities. So those have to be done piece by piece. For example, suppose some customer has given a contract. He has given it to Larsen and Toubro Limited. After we do the contract, we have to tell the customer. That customer has to agree that the remaining part of the contract will be done by some other legal entity. So contract by contract renovation has to be done for a huge number of contracts. So it's -- that's what is essentially taking time.

--------------------------------------------------------------------------------

Puneet J. Gulati, HSBC, Research Division - Analyst [94]

--------------------------------------------------------------------------------

So does it look like the process will get complete in FY '21? Or can it extend beyond that?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [95]

--------------------------------------------------------------------------------

No. I don't think it will -- in our press release, we have mentioned that it should be -- it should get concluded within the next few months. If we are lucky, at the end of this year. If not, hopefully, in Q1 in FY '21.

--------------------------------------------------------------------------------

Puneet J. Gulati, HSBC, Research Division - Analyst [96]

--------------------------------------------------------------------------------

Okay. So we are very, very close. And lastly, your cash flow, there is a line item for disbursements towards financing activities. It's a positive INR 14.7 billion. What does that relate to?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [97]

--------------------------------------------------------------------------------

That was actually a loan book sell down. ARC.

--------------------------------------------------------------------------------

Operator [98]

--------------------------------------------------------------------------------

The next question is from the line of Atul Tiwari from Citi.

--------------------------------------------------------------------------------

Atul Tiwari, Citigroup Inc, Research Division - VP and Analyst [99]

--------------------------------------------------------------------------------

Sir, my question has been answered.

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [100]

--------------------------------------------------------------------------------

Thank you, Atul.

--------------------------------------------------------------------------------

Operator [101]

--------------------------------------------------------------------------------

Next question is from the line of Varun Ginodia from AMBIT Capital.

--------------------------------------------------------------------------------

Varun Ginodia, AMBIT Capital Private Limited, Research Division - Research Analyst [102]

--------------------------------------------------------------------------------

Just I need a quick update on the claims that you have from the Hyderabad government on the Metro side. What's the update on that? About INR 3,000 odd crores claims. And secondly, on the sale of Nabha Power, what is the latest update there? Just these 2 questions.

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [103]

--------------------------------------------------------------------------------

See, as far as Hyderabad Metro is concerned, while the issue is still under negotiation, we'd not like to speculate on what would the final outcome -- what the final outcome could be. So hopefully, when we commission the full Metro, we will be able to give you some idea then.

As far as Nabha is concerned, there are a number of cases pending in the Supreme Court, including a contempt petition that we have filed because PSPCL has not paid their dues and there's another dispute on mega power policy benefits that is pending. So we'll possibly look to see whether we can get a buyer only after these issues are settled at the Supreme Court level.

--------------------------------------------------------------------------------

Varun Ginodia, AMBIT Capital Private Limited, Research Division - Research Analyst [104]

--------------------------------------------------------------------------------

Okay. And just one quick question, I may ask. On the hydrocarbon margins, you have always maintained that 8% to 9%, maybe the most sustainable margin there. But for the consecutive second quarter, the margins have come out very, very nicely. So what's the trend there that we can foresee over the coming quarters? What is the sustainable margin there in the hydrocarbon side?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [105]

--------------------------------------------------------------------------------

See, Varun, here again, I'd again like to urge you not to take quarterly number, margin number, especially margins because they tend to become lumpy. One large project crossing a margin recognition threshold would lead to a bump up in margin. One large claim in a quarter could lead to a bump up in margin. But just look as if the margins that they're getting now on a slightly longer-term basis, not the quarterly numbers, but 9 months appears to be sustainable, assuming that execution efficiency continues at this level.

--------------------------------------------------------------------------------

Operator [106]

--------------------------------------------------------------------------------

The next question is from the line of Deepak Krishnan from Goldman Sachs.

--------------------------------------------------------------------------------

Pulkit Patni, Goldman Sachs Group Inc., Research Division - Equity Analyst [107]

--------------------------------------------------------------------------------

This is Pulkit. So 2 questions. Firstly, we heard that there were some large releases from various government department, payment released in the month of December. Anything that you saw in terms of big, big payments that came in during that particular month?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [108]

--------------------------------------------------------------------------------

I do not like to comment on individual projects. And it is -- at our level, we can't get absolute granular level details on every project we get. So...

--------------------------------------------------------------------------------

Pulkit Patni, Goldman Sachs Group Inc., Research Division - Equity Analyst [109]

--------------------------------------------------------------------------------

No. Sir, basically, what I'm trying to gauge is that despite a muted quarter on infrastructure execution, fourth quarter. Clearly, we are not sounding as worried. So I'm just seeing that is the momentum looking a little better than what it was a few months back? That's basically what I'm trying to gauge.

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [110]

--------------------------------------------------------------------------------

Pukit, I mentioned 3 areas where we lost a significant amount of revenue quarter after quarter, Andhra Pradesh, Coastal Road as well as in Deli in Q4, NCR region. So since those have appear to be getting resolved, 2 are already resolved. The AP one is getting resolved there. Number one, part of the confidence stems from that.

Secondly, the other part stems from the fact that I already mentioned that usually, Q4 is a quarter when most of our customers release payments to exhaust their payment commitment budgets. Apart from the fact that there's no artificial or natural seasonality in Q4, all of the quarters have some sort of seasonality, either very hot months or monsoons or too many or many holidays. But Q4 does not have all that.

--------------------------------------------------------------------------------

Pulkit Patni, Goldman Sachs Group Inc., Research Division - Equity Analyst [111]

--------------------------------------------------------------------------------

Fair point. My second question is now that 50% of our international order book is non-Middle East and particularly, the last couple of quarters, we've seen a pretty significant inflow of orders from international. Could you just give some qualitative difference between ordering in Middle East and non-Middle East, either in terms of risk or in terms of profitability? Anything that you can share on that?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [112]

--------------------------------------------------------------------------------

See, one thing I can say is that operation in the Middle East has become a bit more challenging than it was in earlier years, primarily due to localization efforts there. That's one basic difference that is there.

And you would recollect, Pulkit, that at one point of time, our dependence on Middle East was very high, and that is one of the reasons why we moved into parts of East Africa, North Africa as well as Southeast Asia countries.

--------------------------------------------------------------------------------

Pulkit Patni, Goldman Sachs Group Inc., Research Division - Equity Analyst [113]

--------------------------------------------------------------------------------

But because these are relatively new geographies, just from a risk perspective, how are we sort of protecting ourselves because these are not primarily great geographies, historically? So just wanted to understand that part a little better.

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [114]

--------------------------------------------------------------------------------

Every project that we bid for goes through a pre-bid risk assessment, where all the risks are assessed. And only if all major risks can be mitigated do we bid. To our reckoning, we do a decent due diligence on assessment of risks before putting in a bid for every single project.

--------------------------------------------------------------------------------

Operator [115]

--------------------------------------------------------------------------------

The next question is from the line of Ajinkya Bhat from Macquarie Capital.

--------------------------------------------------------------------------------

Ajinkya Dilip Bhat, Macquarie Research - Analyst [116]

--------------------------------------------------------------------------------

Sir, my question is in your comments about margin, you mentioned about tapering off some losses in transportation infra. So could you throw some color on when those loss-making projects are likely to get completed? Let's say, would that be in 2 quarters from now? 3 quarters from now? And do you have any internal glide path for infrastructure EBITDA margins to go towards -- go back towards, say, 9.5% kind of range?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [117]

--------------------------------------------------------------------------------

I think you would appreciate that we don't give any guidance for individual segments. We give for -- a guidance for all businesses, excluding services business because services business, as you are also aware, has a very different margin profile.

So yes, transportation infra, there's a few projects where we did incur losses in FY '19. When we say incurred losses, we've provided for foreseeable losses, but that means that the remaining part of the project has to be executed on 0 margins. So that obviously depresses margins to some extent. But once those are flushed out, then you could see a better margin profile. And not a -- we'll give you the better color on overall guidance when we declare our results in the month of May. Because by that time, we will have completed our budgeting exercise and then the bottoms-up assessment of where next year's margins are likely to land up with, what position it could be.

--------------------------------------------------------------------------------

Ajinkya Dilip Bhat, Macquarie Research - Analyst [118]

--------------------------------------------------------------------------------

But any time line on when those projects might get completed? Is it 2 quarters worth of executions left? Or 3 quarters?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [119]

--------------------------------------------------------------------------------

Ajinkya, these are different projects with different time lines. So I can't talk about individual projects either.

--------------------------------------------------------------------------------

Operator [120]

--------------------------------------------------------------------------------

The next question is from the line of Aditya Mongia from Kotak Institutional Equities.

--------------------------------------------------------------------------------

Aditya Mongia, Kotak Securities (Institutional Equities) - Research Analyst [121]

--------------------------------------------------------------------------------

So I had a few questions. The first one was on the Hydrocarbon segment. Now as your press release suggests, you have bagged almost nothing in the quarter gone by. Is it reflective of limited bids that one can be making or of heightened competitive intensity in that segment?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [122]

--------------------------------------------------------------------------------

So actually, you see, Aditya, hydrocarbon is one sector where usually the bid sizes are pretty chunky, fairly chunky, could be anything within $500 million to -- $400 million, $500 million, $600 million, $800 million to $1 billion or so. And obviously, the only place -- the Middle East and even in India, some places where investment traction is happening. So these are very fiercely competitive. Every large international hydrocarbon EPC major tends to bid for this. So we have lost a number of bids in Q3. We have lost quite a few bids in Q3. And that's the reason why Q3 order inflows are practically close to 0. But the fact is that we would prefer to be very disciplined in our bidding rather than get orders at any cost. And this business has over 45,000 crores of orders in hand, which is a very, very healthy situation for this business. So we are not desperate to bag orders. But order -- the ordering is happening in hydrocarbon, both internationally and in India.

--------------------------------------------------------------------------------

Aditya Mongia, Kotak Securities (Institutional Equities) - Research Analyst [123]

--------------------------------------------------------------------------------

So just a related question. What do you think are the sustainable margins of this segment? Because the margins have been quite volatile over the past few quarters. And obviously, there are some claims inside, but would you suggest that 10% or above can actually be sustained in this segment? Or should one be thinking through lower numbers or...

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [124]

--------------------------------------------------------------------------------

I think I answered this question earlier. I said that if execution efficiency remains at the same level, then these margins appear to be sustainable.

--------------------------------------------------------------------------------

Aditya Mongia, Kotak Securities (Institutional Equities) - Research Analyst [125]

--------------------------------------------------------------------------------

Sir, the second question was more on the infrastructure pipeline of INR 102 trillion that has been talked about by the government. Now just wanted to get your sense as to whether on the ground, anything is changing for you to be believing that such large amount of CapEx can actually happen? Let's say, issues of cost and time, wouldn't -- to my understanding, nothing is broadly seen. But if you could highlight something different would be useful.

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [126]

--------------------------------------------------------------------------------

See, Aditya, it's difficult to say. Even today, around INR 14 lakh crores of spending -- I'm not talking about ordering, I'm talking about cash spend. Even today happens year-on-year. If you take central government, for example, this year, the central government budget allocation is INR 3.3 lakh crores. Last year, state government spending was more than INR 6 lakh crores. We assume that it will come down to around INR 5 lakh crores this year. PSU CapEx spends are another INR 5 lakh crores. Multilateral funding came in at around INR 70,000 crores. So we are talking about INR 14 lakh crores on a regular basis. And this is without considering any nominal GDP growth. And this INR 102 lakh crores spend that you are talking about is over 6 years. So if you take on an average, INR 15 lakh crores and you multiply by 6, you straightaway get INR 90,000 crores. So it's not too far from the numbers put out by the government, even though the fund -- the main -- the funding pattern is yet to be established. But this sort of spend doesn't seem to be very, very sensible as far as number crunching is concerned if you consider the spends that are happening today. And on a $3 trillion economy, INR 14 lakh crores means $200 billion. That's around 6.5% of the GDP, which is a reasonable assumption if you ask me. It's not too fanciful.

--------------------------------------------------------------------------------

Operator [127]

--------------------------------------------------------------------------------

The next question is from the line of Ankur Deore from Bank of America.

--------------------------------------------------------------------------------

Amish Shah, BofA Merrill Lynch, Research Division - Director [128]

--------------------------------------------------------------------------------

Arnob, this is Amish Shah. Arnob, just a couple of questions. First, on the 10 toll roads that we have, I believe at some point in time, there was some arrangement to put it into an InvIT as well, right? What's the progress on that?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [129]

--------------------------------------------------------------------------------

No. There was no arrangement to put it on an InvIT. Every asset that will go under an InvIT has to go on its own merit. There's no prior understanding as such.

--------------------------------------------------------------------------------

Amish Shah, BofA Merrill Lynch, Research Division - Director [130]

--------------------------------------------------------------------------------

Okay. So do we have anything in the works right now related to those 10 projects?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [131]

--------------------------------------------------------------------------------

See, it will obviously be our focus area to see whether we can minimize our exposure to asset ownership in the infrastructure space. So we will obviously be examining all possible ways of doing so, whether that would be further dilution of our equity stake, whether that will be divestment of assets to an InvIT or any other shape.

--------------------------------------------------------------------------------

Amish Shah, BofA Merrill Lynch, Research Division - Director [132]

--------------------------------------------------------------------------------

Sure. And if possible, can you give us some perspective on what's happening on your realty side of the business?

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [133]

--------------------------------------------------------------------------------

See, As far as realty is concerned, if you take all the projects that we have launched, we've launched around approximately 5,000 flats. We've handed over around 2,000 flats. So these are -- for which revenues have been credited to the P&L account. We still have 3,000 flats to be handed over, of which 1,800 flats have been sold and 1,200 flats are yet to be sold, a broad brush picture, give or take, 10, 12, here and there. Ultimately, you will [need to take out] the revenues of 3,000 flats, they are being credited back to the P&L over the next few years.

--------------------------------------------------------------------------------

Operator [134]

--------------------------------------------------------------------------------

(Operator Instructions) As there are no further questions from the participants, I would now like to hand the conference over to Mr. Arnob Mondal for closing comments.

--------------------------------------------------------------------------------

Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [135]

--------------------------------------------------------------------------------

Thank you. Thank you, ladies and gentlemen, for a patient and interactive hearing. And with this, we'll close this session. Thank you.

--------------------------------------------------------------------------------

Operator [136]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, on behalf of Larsen & Toubro Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.