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Edited Transcript of LT.NSE earnings conference call or presentation 6-Jun-20 5:00am GMT

Q4 2020 Larsen & Toubro Ltd Earnings Call

Mumbai Jun 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Larsen & Toubro Ltd earnings conference call or presentation Saturday, June 6, 2020 at 5:00:00am 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

* Harish Barai

* Ramamurthi Shankar Raman

Larsen & Toubro Limited - CFO & Whole-Time Director

* Sekharipuram Narayanan Subrahmanyan

Larsen & Toubro Limited - CEO, MD & Whole Time 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

* Abhishek Poddar

* Aditya Bhartia

Investec Bank plc, Research Division - Analyst

* Aditya Mongia

Kotak Securities (Institutional Equities) - VP

* Amish Shah

BofA Merrill Lynch, Research Division - Director

* Amit Mahawar

Edelweiss Securities Ltd., Research Division - VP of Institutional Equities Research

* Ashish Shah

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

* Bhalchandra Shinde

Anand Rathi Financial Services Limited, Research Division - Research Analyst

* Charanjit Singh

* Keshav Lahoti

Angel Broking Private Limited, Research Division - Analyst

* Mohit Kumar

IDFC Securities Limited, Research Division - Analyst

* Nishant Chandra

Temasek Holdings (Private) Limited - Associate Director, India

* Parikshit D. Kandpal

HDFC Securities Limited, Research Division - Research Analyst

* Priyankar Biswas

Nomura Securities Co. Ltd., Research Division - VP

* Puneet J. Gulati

HSBC, Research Division - Analyst

* Renu Baid

IIFL Research - VP

* Shalini Vasanta

* Sumit Jain

ASK Investment Managers Limited - Portfolio Manager

* Sumit Kishore

JP Morgan Chase & Co, Research Division - Research Analyst

* Venugopal Garre

Sanford C. Bernstein & Co., LLC., Research Division - Senior 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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Good morning, ladies and gentlemen. A very warm welcome to our Q4 and FY '20 earnings call. The presentation -- analyst presentation was uploaded on our site last night around by 8:00 or so. I hope all of you have downloaded it. The format that we will follow is that my colleague, and all of you would have met him or talk to him sometime, Mr. Harish Barai, will walk you through the presentation. And after that, we'll open the session to questions and answers, which Mr. S.N. Subrahmanyan, our CEO and MD; as well as Mr. Shankar Raman, our CFO, Group CFO, will take. Just one small point, since Mr. Subrahmanyan and Mr. Shankar Raman will be taking the Q&A, I would just request all of you to kindly concentrate on broader things like strategy and business. And if you have any nitty gritty questions, you can always ring me off or send me an email off-line subsequently.

With that, I'll hand it over to Harish. Harish, you can please go ahead.

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Harish Barai, [2]

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Yes. Thank you, Mr. Mondal, and good morning, ladies and gentlemen. Once again, a very warm welcome to all of you into the Q4 and FY '20 earnings call of Larsen & Toubro Limited.

I will move on to the next slide on disclaimer. Essentially, this presentation contains certain forward-looking statements concerning L&T's future business prospects and business profitability, which are subject to a number of risks and uncertainties, and the actual results could materially differ from those in such forward-looking statements.

The remaining portion of the statement I will take it as read and move on to the next slide, which is Slide #4 . The performance highlights for FY '20.

Our order inflows for FY '20 at INR 1,864 billion, registered a growth of 9% over the previous year. Our revenues for FY '20 at INR 1,455 billion registered a growth of 8% over the previous year. And our EBITDA and PAT for FY '20 grew at 7% each over the previous year. Our order book as on March '20 is at INR 3,039 billion, up 4% over March '19.

These numbers have to be seen in the context of the current domestic macroeconomic environment. FY '20 order inflows grew by 9%, even in the face of subdued business environment and economic challenges.

Coming to revenues. Despite carrying a large order book, we consciously slowed down execution to prevent further working capital buildup. Payments from the public space, as you know, has not been very encouraging during the year. Secondly, as you are aware, 5% of our order book was not moving for most parts of the year. Lastly, COVID-19 also impacted revenues in the March quarter. Despite all these challenges, our revenues for the year FY '20 grew 8%.

If we were to just summarize, we could say growth achieved in a difficult year. With those comments, I will move on to the next slide on key financial indicators.

Now the quarterly numbers are mentioned on the left portion of the slide, and the full year numbers are on your right. Since we have broadly covered the full year numbers in the previous slide, in this slide, I will mainly focus on the quarterly numbers.

Our order inflow in Q4 FY '20 at INR 578 billion, up 5%, primarily on the back of significant orders received in the infrastructure segment. Our order inflows have grown in Q4 FY '20 despite the high base in the corresponding quarter of the previous year. Our revenue for Q4 FY '20 at INR 442 billion, up 2%, despite challenges faced due to COVID-19 and a work-from-home or a lockdown kind of environment in the last fortnight of the quarter. Our EBITDA and PAT for Q4 FY '20 at INR 51 billion and INR 32 billion, respectively, has registered a degrowth of 3% and 6%, respectively, mainly due to execution challenges that I -- that are arising out of not moving jobs and impact of COVID-19.

Just to mention here, we lost about INR 17.5 billion of revenues in Q4 due to COVID-19 and around INR 4 billion of PAT, which includes COVID-19 provisions in FS business and around INR 15 billion of collections due to partial -- complete lockdown in the last fortnight of March '20.

Some comments on working capital. Our net working capital at 23.7% in March '20 is up from 18.1% in March '19. As I mentioned in the earlier slide, payments from the public space has not been very encouraging during the year. In addition, you would recollect that we had to support our vendor ecosystem in Q1 of FY '20. Now at this juncture, I want to just mention that as a company philosophy we have been doing a balancing act between revenues and working capital for last couple of years now.

Secondly, we would also like to mention here that despite a tough March quarter, there has been no sequential worsening in net working capital levels from Q3 FY '20 to Q4 FY '20. Lastly, contrary to popular perception, we did receive collections from clients even during the last week of March '20, and we have enough liquidity buffers on our balance sheet. Our return on net worth for financial year FY '20 is at 14.8% from 15.3% in March '19.

As I said, our inability to execute 5% of our order book during large parts of FY '20 as well as the COVID impact in the last quarter had an impact not only on the revenue growth, but also impacted PAT and consequently our return on net worth.

With those comments, I will move on to the next slide, which is Slide #7: Q4 FY '20 order inflow/order book. Our order inflow numbers, again, on the left, order book on the right. Our Q4 order inflow at INR 578 billion, up 5% over the corresponding quarter of the previous year, largely on the back of strong domestic order inflows. In an otherwise subdued March quarter, it is good to note that domestic orders were back in Q4 FY '20. In FY '20, we managed to secure almost the same level of domestic orders as last year.

Our order inflows for FY '20 at INR 1,864 billion, up 9% over the previous year, largely on the back of international orders. We had international order wins in power transmission and distribution, metallurgical and material handling business, water affluent and IT&TS segment.

Coming to order book. Yes. A strong order book provides a good hedge against cyclicality. You will observe from the numbers that our international order book as a percentage of total order book has moved from 21% in March '19 to 25% in March '20.

Today, we have 6 business verticals where each of their order book is between 9% to 15% of the overall order book. They are buildings and factories, water, power transmission and distribution, heavy civil infra, transportation infra and hydrocarbon. Diversity of order book helped, and future revenue growth is not dependent on the fortunes of any single vertical.

With those comments, I will move on to the next slide. Group performance, sales and costs. Since you have already explained the revenue variance for Q4 FY '20 and FY '20, we will move on to other P&L items.

If you will observe, MCO, as a percentage of sales, has declined for Q4 FY '20 and full year FY '20, largely explained by 2 factors. One, due to the higher proportion of IT&TS business, which is largely due to Mindtree consolidation. And secondly, due to cost-control initiatives within the group.

Finance charge OpEx largely represents borrowing cost of financial services business. Staff costs increased for Q4 FY '20, and FY '20 is largely explained by Mindtree consolidation and resource augmentation in our service businesses. Sales and administration increased for Q4 FY '20, and FY '20 is mainly on account of credit provisions in the financial service business and Mindtree consolidation. Consequently, our total OpEx at INR 391.3 billion for Q4 FY '20 is up 3%, and total OpEx for FY '20 at INR 1,291 billion is up 8%.

With those comments, I will move on to the next slide, which is Slide #9: group performance profit stack. For reasons explained in the previous slide, our EBITDA for Q4 FY '20 at INR 51.2 billion has registered a degrowth of 3% and EBITDA for FY '20 at INR 163.3 billion is up 7%.

The finance cost increase for Q4 FY '20 and full year FY '20 is commensurate with group debt levels reflective of the scale of operations and phased commencement of Hyderabad Metro. Our average borrowing cost at a parent level in FY '19-'20 is around 7.5%, which is one of the lowest amounts corporates. Our parent company, as you know, enjoys the highest credit rating in India.

Higher depreciation charge for Q4 FY '20 and FY '20 is on account of Mindtree consolidation and right-of-use assets. Other income is reflective of the level of short-term investments at a group level and higher yields earned during the year on those investments.

JV associate PAT share reflects IDPL assets, forgings and Power JV's performance. NCI variation is largely due to Mindtree consolidation, increase in LTI/LTTS share and moderated by lower financial services profits. E&A business has been classified as discontinued operations. Consequently, our Q4 PAT at INR 32 billion has registered a degrowth of 6% over the corresponding quarter of the previous year and our full year PAT at INR 95.5 billion, up 7% over the previous year.

With that, I will move on to the next slide, which is Slide #11: segment composition. This slide on segment composition is essentially for reference purposes. E&A segment has already been classified as discontinued operations and consolidated at a PAT level. Information technology mentioned within the IT&TS segment includes Mindtree.

Moving on to the next slide: FY '20 order inflow composition. This slide is again for reference purposes. As you can see, 55% of our total order inflows in FY '20 is from the infrastructure segment. If you recollect, up to 9 months FY '20 infrastructure as a percentage of total order inflows was 48%, essentially means that our Q4 FY '20 order inflows have largely been powered by the infrastructure segment.

Moving on to the split between domestic and international. 68% of our total order inflows are domestic and 32% international. Now last year, in FY '19, our international order inflows were 26% of the total order inflows. In the current year, 44% of our international order inflows is from GCC, whereas in the previous year FY '19, 33% of our international orders was from GCC.

We'll move on to the next slide: FY '20 order book composition. As you can see, 89% of our order book of INR 3,039 billion is dominated by infrastructure and hydrocarbons. Within infrastructure, as I mentioned earlier, the order book is very well diversified across 5 large verticals. We are predominantly an India-centric company, and therefore 75% of our total order book is India based.

Now over the last couple of years, we have tried to consciously move away from the Middle East. These efforts have borne fruit, and about 44% of our international order book today is non-Middle East.

With those comments, I will move on to the next slide: FY '20 revenue composition. This slide is again for reference purposes, and there are no major observations in this slide, except that infra continues to dominate the revenue by 50%. And secondly, 67% of our total revenues in FY '20 is domestic. And within International, 42% of our revenues is Middle East.

With those comments, I will move on to infrastructure segment, Slide #15. Now infrastructure segment, as you are aware, is the largest segment within the group. And obviously, the financial fortunes of this segment impacts the group performance.

Quick comments on order inflow before we move on to other financial parameters. As I said earlier, the segment has witnessed strong order wins in Q4 FY '20, both from domestic and international in an otherwise challenging quarter.

Our full year order inflow in the infrastructure segment crosses the INR 1 trillion -- INR 1 trillion mark in FY '20. Order wins were in varied areas of health sector, affordable mass housing, power transmission and distribution, renewable energy, airports, industrial water systems, water supply and distribution projects, hydel projects, network management system, gold beneficiation plant and railway freight facility package. Consequently, the order book of this segment is INR 2.24 trillion as on March '20.

Coming to revenues, for FY '20, infra revenues at INR 730 billion, up 1% -- is up 1%, whereas for Q4 FY '20, infra revenues at INR 253 billion has registered a degrowth of 6%. Now muted revenue growth for Q4 FY '20 and FY '20 is largely reflective of execution challenges on account of stoppage of AP jobs, slow-moving orders, funding constraints and finally impact of COVID-19.

And as I said earlier, we would not compromise our balance sheet for the sake of execution. Due to this inability to execute jobs in a tough environment and also the fact that some of our large value jobs did not cross the margin recognition threshold finally impacted margins for this segment. As a company philosophy, we do not recognize margins till the jobs cross a certain margin recognition threshold.

Secondly, Jan to March quarter is a seasonally strong quarter for progress in the infra segment. We have also been impacted by the slowdown and finally leading to the lock down in the month of March. Consequently, our FY '20 margins for this segment has moved from 8.5% in FY '19 to 8.1% in FY '20.

We move on to the next segment, which is the power segment on Slide #16. Now slow order inflow in the current year -- sorry -- I'm sorry, strong order inflow in the current year replenishes the order book and provides healthy revenue visibility for the coming quarters.

Revenues for this segment at INR 5.6 billion for Q4 FY '20 registers a degrowth of 40%, whereas revenues for the full year FY '20 at INR 22.9 billion registers a degrowth of 42%, largely reflective of the depleted opening order book and tapering of international jobs. The new job awards during the current year are yet to pick up execution momentum.

Margins again are reflective of job mix and state of execution. The substantial increase in Q4 FY '20 and full year FY '20 margins is on account of client claims.

Finally, as you are aware, power business margins always appear optically low because boiler and turbine JVs as well as the other power JV companies are consolidated at a PAT level under the equity method.

With those comments, I will move on to the next slide, which is Slide #17: Heavy Engineering segment. Quick comment on order inflow before we move on to other financial parameters.

This business segment had a robust order inflow in the previous financial year, which is FY '18-'19. Current year awards are impacted by deferments. However, that, again, I guess, to some extent, would be dependent upon the economic cycles of global oil and gas industry.

Revenues for FY '20 at INR 28.5 billion, up 31%, largely driven by the strong opening order book. Q4 FY '20 revenues have largely been impacted by client delays and shutdown. Coming to margins. Global competence, technology differentiation, proven track record and cost efficiencies yield strong margins for the business. Q4 and fiscal year margins have been impacted by cost provisions.

Moving on to the next segment, which is defense engineering. This is on Slide #18. Policy bottlenecks, fiscal constraints and lengthy MoD procurement procedures have continued to reset investment momentum in this sector for many years now. Consequently, large order inflows are missing. And order inflows in the current financial year comprises of multiple small value orders.

Having said that, the very recent announcements on the time bound, defense procurement processes and faster decision-making awakens hope for the future. Announcements around separate budget provisioning for domestic capital procurement is also a positive.

FY '20 revenues at INR 39.7 billion, up 6%, led by the noteworthy progress in the execution of a marquee order for track artillery guns. Q4 FY '20 revenues at INR 9.3 billion, down 15%, largely impacted by delays and nonreceipt of targeted orders. Margins reflect stage of execution, job mix and operational efficiency. L&T Shipbuilding Ltd., a 100% subsidiary under Defense -- under the Defense Engineering segment, has now been merged with the parent after obtaining NCLT approval. However, this does not have an impact on group financials, the (inaudible) given the advertisement.

Moving on to the next segment, which is the hydrocarbon segment. This is on Slide #19. Now hydrocarbon segment has been doing very well. And today, there is an unexecuted order book close to 3 years of revenue. Hydrocarbon business had significant order wins in the current financial year from both domestic and international markets. Slowdown in Q4 order inflows was largely due to global volatility in oil prices. Moreover, Q4 FY '19 had a large international order, which is the last year -- last quarter of FY '18-'19. So the base effect obviously comes to play again.

Strong revenue growth of 15% for Q4 FY '20 as well as full year FY '20 on the back of in line execution of a large opening order book. Finally, margins are contributed by efficient execution, job mix and claims.

Moving on to the next segment, which is the Development Projects segment. Now Development Projects segment comprises of, as you know, Power Development business and Hyderabad Metro. In the previous year, this segment included Kattupalli Port as well.

You would recollect that we sold our Kattupalli Port last year. Here again, roads and transmission lines are consolidated at a PAT level under the equity method. So obviously, the numbers presented in this slide do not include roads as well as transmission line. Now the balanced stretch of Hyderabad Metro was commissioned during Q4 FY '20, with which the metro is now fully commissioned. Revenues of this segment is largely contributed by power development business.

For Q4 FY '20, the revenues of this segment at INR 9.8 billion, down 9%, largely due to the maintenance shutdown, it's a regular maintenance shutdown of 1 power unit during the period. Secondly, lockdown impacts metro ridership in March '20. Full year FY '20 revenues at INR 48.5 billion, down 4%, largely due to Kattupalli Port sale in the previous year. Margin profile of this business segment is still emerging primarily because the final outcomes will depend on the various claims that we have filed in respect of metro and the court case is Nabha Power. While metro ridership is dependent on external factors, we will be looking -- we will be working towards TOD monetization, financial restructuring and induction of equity partners.

With those comments, I will move on to the next segment, which is the IT&TS segment. All the 3 companies in the IT&TS segment are listed companies, and they had their earnings call as well. All the numbers are available in public domain.

Revenues from the IT&TS segment for Q4 FY '20 at INR 63.5 billion, up 68%. And for full year FY '20 at INR 221.4 billion, up 54%, primarily because of Mindtree consolidation from Q2 FY '20 onwards. It is important to note here that all the 3 listed IT subsidiaries have posted healthy Q4 numbers in an otherwise challenging quarter.

An array of business verticals have contributed to the strong growth within each of these companies, the details are mentioned in the slide. It is important to note that none -- that each one the listed subsidiaries have smoothly transitioned to a work-from-home environment during the pandemic with encouragement and support from customers. Margin variation, again, is the outcome of increased resource cost.

We move on to the next slide, which is Slide #22, this is on the other segment. The other segment comprises of construction and mining equipment, rubber processing machinery, industrial walls and Realty business. Q4 FY '20 revenues of this segment at INR 11.3 billion, down 13%, largely due to the delayed handovers in Realty business. Secondly, low demand impacts construction and mining equipment revenues. However, walls business records growth on the back of large opening order book.

FY '19 revenues and margins of this segment are higher compared to FY '20. So I'm again repeating, FY '19, which is the previous year, revenues and margins of this segment are higher compared to FY '20 primarily because previous year included lumpy sale of commercial premises in Realty business.

Moving on to the next slide, which is the L&T Finance Holdings Group. Now L&T Finance Holdings listed company again, and they had their earnings call as well, all the numbers available in public domain. For Q4 FY '20 as well as FY '20, income from operations has grown 6% and 9%, respectively. Now the group over the last couple of years has demonstrated tremendous resilience despite the challenges facing the NBFC space.

The group continues to maintain healthy capital adequacy levels and sufficient liquidity buffers in its balance sheet during these challenging times. L&T Finance Holdings and all its lending subsidiaries have been reaffirmed at AAA from all the 4 rating agencies. Company 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 ALMs as well as diversification of fund sources over time.

Without getting into the numbers above, let me mention here that FY '20 profits have largely been impacted due to onetime restatement of opening deferred tax assets post migration into the new tax regime. Q4 FY '20 profits have largely been impacted on account of credit costs arising due to COVID-19 provisions as per RBI guidelines.

With those comments, I will move on to the next slide, which is electrical and automation. This is on Slide 24.

As mentioned earlier, E&A business has been classified as discontinued operations in FY '20. You would have observed in the earlier slide that PAT from E&A business is being aggregated as a separate line item in our profit and loss account. Now FY '20 revenues at INR 52.3 billion registered a decline of 10%, primarily due to reduced industrial offtake in a soft demand environment. Muted revenues in Q4 FY '20 is a product of soft demand and COVID lockdown. Consequently, margins are also lower in Q4 FY '20.

We will move on to our final slide on environment and outlook. This is on -- this is Slide 26. Now just when some green shoots of economic recovery were visible in early parts of Q4 FY '20, India got impacted by COVID-19. Consequently, India's real GDP growth fell to 3.1% in Q4 FY '20, and full year FY '20 real GDP growth fell to 4.2% versus 6.1% in FY '19.

Now Government of India and RBI, both put together, have announced total measures of INR 20.97 trillion, which is roughly about 10% of our nominal GDP. Being an exception year, both the central government and the state governments will be borrowing an additional INR 9 trillion for FY '21 to substitute for the shortfall in tax revenues and handle the forecasted expenditures for the year.

Now as a company, we are back to our feet, and at present 90% of our sites are operational. Secondly, around 40% of labor is available with us today. We are in the wait-and-watch mode, and any type of forecasting is fraught with uncertainties till the macroeconomic situation stabilizes.

We will be reworking our numbers once the dust settles down. In fact, even the government of India is waiting to recompute the budgets for the year.

So if we have to talk slightly longer term, government has come out with a detailed roadmap around national infrastructure pipeline with projects of INR 111 trillion. Around 85% of these total NIP spends will be in areas like energy, roads, railways, urban infra and [irrigation].

Since we are present across the entire infrastructure spectrum, we will definitely benefit from these spends. We believe much of it is achievable if India achieves a nominal GDP growth of 9% to 11% over the next couple of years, which is not a tall ask for any means, whatsoever. We do believe that our large order book, a strong balance sheet, a robust business portfolio and our capability spectrum will get us through this challenging period. Moreover, 80% of our domestic order book is from the central government, state government and PSUs. Believe me, government credit risk is the best risk to have in these challenging times.

Thank you, everyone, for the patient listening, and we will now commence the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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

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Sumit Kishore, JP Morgan Chase & Co, Research Division - Research Analyst [2]

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Sir, I have two questions. The first question is, what is the proportion of slow moving or nonmoving orders in backlog currently due to COVID-19 or other factors across your domestic and overseas order backlog?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [3]

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S. N., if I can take this. Sumit, during the course of the year, we have been actually removing some of the nonmoving or, in our assessment, difficult to execute projects. So for the entire year of FY '20, where we have reported a 3 lac 3,000 crore order book is after removing about INR 29,000 crores during the year in aggregate. And it is not specific to COVID, it is specific to issues surrounding the project as an award. For example, all the Andhra Pradesh orders that we won in the prior year, which is due unfit for execution in the current year, got removed.

And likewise, there are some orders which are subjected to green tribunal stay and those have got removed as well. And a few of the building orders that the real estate sector took a beating, and many of the developers who had placed some orders on us, we had to reassess the viability of those projects and remove them. So the 3 lakh 3,000 crores has next to nothing in terms of nonmoving orders. We do believe all the orders that we have reported are executable, subject to, of course, the current pandemic situation.

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Sumit Kishore, JP Morgan Chase & Co, Research Division - Research Analyst [4]

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Sure. And because of the pandemic situation, you would say what portion of the order backlog is probably not moving?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [5]

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So as I was telling you, we think all the orders that we have in the order book are executable and they're capable of moving forward. The only uncertainty is how long is this restriction and movement of people, movement of goods, et cetera, are going to exist in the larger scheme of things in India. And once those are sorted out, I think each of this 3 lakh 3,000 crores is executable and not slow moving.

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Sumit Kishore, JP Morgan Chase & Co, Research Division - Research Analyst [6]

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Sure. My second question is, could you please elaborate on the order inflow prospect for the year ahead? And the visibility, especially on the big ticket order prospects. I know there's a lot of uncertainty, but within the constraints.

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

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S.N.S, would you like to go on this?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [8]

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Yes. This is early days, my friend, but we see good prospects or the good is not a nice word to use nowadays, reasonable prospects in some of the segments like heavy civil, power transmission, water and heavy engineering. These are expected to gather momentum over time.

There are fairly large value tenders in hand. And that is the norm. We don't get into specifics, which are the tenders, but they're fairly large value tenders on hand, both domestic, Middle East as well as from Africa. And we should see the light of the day as we go forward.

We are L1 in quite a few of these tenders. There are also a fair amount of proposals on hand to take it forward. Some of the businesses like hydrocarbon, buildings, transportation, we see the prospects, but not immediately. Maybe it will start coming back into stream by Q2, Q3, and maybe those will be something specified during the later part of the year.

Construction equipment and business like that, we expect the momentum in the later part of the year. As you would know, the mining sector has also been opened up. We do expect fresh investments to come in. We expect mines which are -- which have been blocked but now can be opened up from a mining activity point of view to be opened up in the later part of the year or maybe sometime in the early part of the first quarter of next year, I mean, the January-March part of the quarter. And therefore, those should also pick up at that. So overall, there's nothing to say that it doesn't look very good, but it could be better, but things are positive.

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Operator [9]

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The next question is from the line of Mohit Kumar from IDFC.

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Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [10]

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Yes. Good morning, sir, and congratulations on the good order inflow in a tough environment. I do understand the restraining from giving any order set revenue by (inaudible), but how is the (inaudible) -- how is the execution panning out in Q1, the working capital challenges? And how has the activity picked up in recent mix? And when do you expect this to go back to a slightly normal level and these challenges, can you speak -- can you comment on that?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [11]

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So as I see it, it's a no-brainer that April and May have been difficult. So India is one of the few countries -- probably the only country in the world which had a total lockdown. And the lockdown, in my opinion, was enforce fairly strictly in many -- in most parts of the country, with not only the states taking power, strict powers, but also local district magistrate, (inaudible) and others abrogating sufficient powers to ensure a total lockdown.

Therefore, whatever billing could be done was more on the engineering procurement and certain minimal activities from safeguarding point of view, but not much work could take place. It's also a fact that we had held back nearly 160,000 odd laborers in our various labor camps and facilities. And to hold human being, so more than 2 months is no means an easy task. We did give them wages. We gave them breakfast, lunch and dinner. We took care of the medical and such facilities. And as far as domestic is concerned, there are hardly any cases of COVID positivity or any other factors from that point of view. So I think our administration has done a reasonably good job from that point of view.

It's clear that due to psychological reasons, due to the need to go back to the families, due to the various media and such as the news that is coming out, as soon as the restrictions are limited, the labor did want to go back to Baras, as we call it, from the villages and towns, predominantly from the eastern part of the country, even northern and eastern part of the country. And much of the (inaudible) trains and other facilities the government had opened up was filled with these laborers going back and quite a bit of them must have been (inaudible) there in (inaudible), too.

So now the challenge in center (inaudible) to get these labor back. It's not a new challenge for us. As you know, in a year, 3 -- 4, 5 times, the labors go back and come back during the harvest season, during the Holi season, during the Diwali season and during other festivities like marriages, et cetera.

So if we have to employ, we normally employ about 270,000, 300,000 laborers. And that means we employ 4 or 5x that, that means about 1 million, 1.25 million people is what we employ because many of them go back, the same labor doesn't come back, somebody else comes back. But that's how they operate.

So this is not something which is impossible for us. We've been doing it every year. So we have put our organization back to work to get back these laborers. The good thing is that most of the people in the country want to work hard, self-respecting, they want to earn their living. And by doing the jobs that they know and being correct about it, so there is an innate feeling in many people to get back to work now that they've seen their families and seen that most of the conditions are okay and such. Now we already got back quite a few laborers at the later -- at the pre-COVID, it was about 170,000. And during the last 3, 4 weeks back, it went down to 70,000. Now it has come back to about 120-odd thousand. Every day, we are adding about 1,500, 2,000 laborers. The speed of adding labors expect to pick up.

As this happens, we need to get back to about 220,000 as we see it right now to get back to more or less the kind of activity that we did. And if that happens, I think we should get back to billings. It should take another 30 to 45 days, in my guess. The monsoon is happening also at the same time, so maybe at some point of time we have to be more careful, not only from social distancing and other norms that exist from a work point of view but also from the monsoon point of view, one tends to be careful when monsoon time to prevent accidents and such.

So I guess, in another 45 days, if the pandemic does not reappear again in some manner, does not create any other scare, we should be back. And that's one worry which nobody can answer any question as of date. Luckily, for us in India, though, there are COVID positive cases, the number of death fatalities is comparatively compared to the rest of the world is very negligible, though it's very unfortunate that some deaths are happening.

But I do hope that it doesn't become a W and it subsides as a V, and that only one can pray towards that, and that's not in our control when it comes to that.

But assuming that -- from that point of view, something which can be managed and which does not create any further clutter, I think we should get back to very normal things by about 30 to 45 days. So that's the way I would like to answer that.

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Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [12]

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And sir, can you talk about the challenges in the first quarter?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [13]

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Yes. Okay. So you have to look at working capital in 2, 3 different directions right now. Yes. The working capital during the last quarter went up a little bit for 2 reasons. Number one, the clients had their own difficulty in paying. Second, I think we, as an organization, also took a very clear view that we have thousands of small-scale industries and other smaller vendors and people who believe in our ecosystem, who trust us and who survive because of the work that we give them and that we expect out of them.

And therefore, it is very, very important for us to support them. And we took a policy, in fact, that all the vendors will be paid and to the extent possible, wherever there were issues, we sorted them out, we paid them. And to that extent, some cash outflow was there beyond the collections that we did. As my colleague, Shanker and Harish, said earlier, even during March, even during the pandemic, we did one of the record collections. And even during April and May, the collections have been fairly decent from that point of view. Now what we've got to see is that we've got to keep to maintain the pressure to ensure the collections continue.

A very good thing that has happened, and I would like to compliment the government also out here, they understood the industry is facing problems. In much of the government jobs, and as you know, 80% of the jobs are government jobs, whether its central state or public sector, a great effort has been there to have dialogue with us.

And even during the pandemic times, we've had extensive Teams, Zooms or bridge calls or whatever. And we have been able to water down the contract conditions to the extent that the payments have been -- the advance [requery] has been postponed. Certain milestones have been broken down. Certain milestones have been preponed. Certain way of billing has been altered.

And therefore, the anxiousness on the part of the authorities, whether it is central state or public sector, to ensure that cash flow if maintained during this time, as they knew that as an organization L&T and maybe others too were doing a national duty by helping out laborers, maintaining them and so on and so forth, including facilities. And therefore, there has been quite a bit of easing on that. So this should help us next 6, 7 months as we go forward. And therefore, I feel there should not be any major problem on working capital beyond what it is right now.

The only negative effect that could arise due to the pandemic going forward as fresh proposals and tenders come into our books, one should be careful to see that due to the tightening of budgets, due to nonavailability of sufficient funds as before, it should not be the case that the government organizations or the public sector put payment conditions, which are more back ended, which have interest -- which are mobilization advance, secure advance, which are of higher -- which are of -- which are high interest-bearing and such because that will deteriorate the payment part of it from a contractual point of view.

And as for the moment, we don't see anything. But we do expect that something could happen like this in certain cases. But as of the moment, things are as they are, and we hope to take it forward.

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Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [14]

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Sorry, just as upon the (inaudible).

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Operator [15]

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This is the operator. I mean, sorry to interrupt. Mr. Kumar, your voice is breaking.

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

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Yes. Can't hear you at all.

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Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [17]

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Can you hear me now?

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

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Yes, much better.

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Mohit Kumar, IDFC Securities Limited, Research Division - Analyst [19]

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My second question is you did touch base on domestic execution. Can you touch base (inaudible) on the international order execution in the pre-COVID, post-COVID situation?

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

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So international, there are 2 parts international, basically, Middle East and Africa. And from a Middle East point of view, I think all the orders are going -- whatever we have as a backlog in the hand are all executable orders, are all moving quite well.

There has been incidences of COVID positive cases there, including quarantine of some fair amount of staff and labor in some of the key sites. No major incidents, per se, but as a precautionary measure, the clients are overreactive there because of the -- maybe the less population and more availability of facilities and testing. To that extent was slightly got affected for the first 2 months, but things are getting back to normal.

So all the sites are moving, all the clients are positive, payments are coming in. And as of the moment, things are moving as they should from an execution point of view.

Now we do expect that because Middle East has gone through a double whammy: one, the oil price coming to where it is right now, and second, the corona issue. So we do expect further prospects for Middle East to slow down a bit. The (inaudible) study and others indicate that oil prices get back to $50, $55 somewhere during the end of the year. So maybe till the time, there will be certain amount of traction from an executable -- from a new proposals point of view. But there are new ways of doing business coming up there. We're certainly seeing a fair amount of traction on solar. We are seeing very social infrastructure schemes is being rolled out. And therefore, maybe there's another way to look at it. Therefore, we are still neutral on Middle East, but what is going on is going on decently well right now.

From an Africa point of view, there's -- some of the states did get affected with corona, but largely, it has been less from an overall point of view compared to India, Middle East. There has not been any major quarantine or any COVID positive cases in any one of our sites. The works are going on as normal. There has been some slight nonavailability of labor because of the psychological issues of pandemic, et cetera, that people are maybe trying to be restrictive in their moment. But that issue should be got over in another 14, 20 days from our point of view.

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Operator [21]

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(Operator Instructions)

The next question is from the line of Renu Bid from IIFL.

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Renu Baid, IIFL Research - VP [22]

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First question is to just understand a bit more on -- for an update on the E&A business, which was due for sales closure by the end of June. So how are we moving that with respect to time line? And broadly, what would be the broad planned utilization of the funds, given that in April we have raised about INR 90 billion of (inaudible) entity. So how should we look at the sale transaction along with the utilization of the funds thereafter?

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

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From an EIC sales point of view, the transaction was supposed to be completed by March 31. We could not do it because plans got logged out from around February. And therefore, the senior people from Schneider could not move out of Paris and their offices and therefore certain work and detailing that out to have been done could not be done.

Second, from our point, also, as you know, this is a business within the (inaudible) and to grow existing system. And therefore, there was land involved, properties involved, various building structures involved, there was innovation of contracts involved and such. It is work in progress. We are -- come to a fairly high point in terms of closing out much of the issues. I think, hopefully, as soon as the international travel begins and when we are able to sit across the table, a few of these matters, which needs to be checked and cross-checked and verified before one does the transfer will be done. I guess give us another 2 to 3 months, and they should be on its way from that point of time. And I would request Shankar to answer that other question that you asked.

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [24]

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Yes. Renu, I think the resource raising that we did was actually in anticipation of the requirement for the year. Half of the resource that we raised will be to refinance maturing liabilities, and the other half would be for our growth requirements. So to that extent, the resource raising has been more of using the proceeds for the year's requirement. The proceeds that Schneider transaction would release is actually capital unlocking, and we would like to possibly use the proceeds to rightsize the capital allocation that we have done to our large projects, like the Hyderabad Metro and stuff like that.

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Renu Baid, IIFL Research - VP [25]

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Okay. All right. Second would be, also, aligned capital allocation, do you think there would be any requirement for equity inclusion in any of the subsidiaries, which could be a bit strained during this lockdown period, especially there have a lot of investor concerns on capital infusion required in finance holdings, so any view on that?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [26]

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See, finance holding is a debt play, right? I mean if you want to retain the AAA that we are, our debt equity has to be around 6%, 6.5%. And currently, it's almost at 5.6%, 5.7%.

The growth has slowed down, and hence the disbursement has slowed down. So recircling the existing capital on collections, et cetera, to meet the current requirements at this pace of operations is okay. But if the operations were to pick up in, let's say, second half of the year, post monsoon, the rural India settles down and the operation picks up in rural India, a lot of our disbursements go there. Then possibly, we might have to relook at the need for capital. This business every 2 years, every 3 years, depending on the growth, would go in for capital injection because that's the nature of the beast.

So I think when we come to that point, we might have to look as to whether further capital for the company is required. And we'll also have to take stock of the market at that point in time for either dilution or in terms of rights. Those bridges we'll cross at that time.

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Renu Baid, IIFL Research - VP [27]

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Sure. And my last question would be here relating to the asset monetization strategy. Now that large 2 assets are left in the portfolio, which are (inaudible) monetized, you have the Nabha Power and Hyderabad Metro. So what would be the broad outlook in terms of the road map for kick-starting the monetization process, partially or fully, of these these projects, especially on the Hyderabad Metro. There was some plan infrastructure over the next 12 to 24 months?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [28]

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Yes. I think, unfortunately, the plan was cooking up nicely and then this pandemic happened and throw a spanner in the wheel.

So first, we'll have to wait for the trains to start. As you know, as a part of this lockdown, the Metro network has been shut. And so whatever ridership that we're having in pre COVID has come to 0 now, been the case for the last 2 months. We'll have to wait and watch when the state feels confident to open it up. And then the ridership has to climb back.

And secondly, we also, through this period of lockdown, experienced, all of us, that it is possible to us from home to be productive. So many companies are reviewing their policy about how much of infrastructure they should incur by setting up large grand offices. Or how much can actually be achieved from sitting at homes.

So I think every organization will go through some reassessment of this requirement. And that will also have a bearing on the ridership because Hyderabad, as you know, like Bangalore, is a very highly strong commuter traffic. So to that extent, we have to wait and watch as to how these developments happen. Ultimately, it will happen because our intention to unlock capital is very much on cards, no change in that strategy. Timing could have to suit the environment.

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Renu Baid, IIFL Research - VP [29]

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So probably it might be FY '20 to '23, that market travel in '21 for at least a half of this as well.

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

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(foreign language) Why don't you wish things can improve fast and we can get back fast. So we'll do it ASAP, Renu.

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Operator [31]

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

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Venugopal Garre, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [32]

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My first question is more to understand the contractual obligations on the number of projects you have, given that there are several sites and several projects you simultaneously work and each of them might have different obligations. The background to this is that in a situation where you have a couple of, let's say, 1, 2 months of delay and, well, it has already happened. So 2 things happen. One is, of course, there would be extra costs because you would have some lease equipment where you're paying money, would have payed money to labor, while there's no work going on. And more importantly, there'll, of course, be some delay in terms of time line of delivery of the project.

The third thing is the fact that you're heading into a monsoon season, right? So I'm assuming that when you, sort of, create your project schedules, you always decide what to do during monsoon and what to do pre monsoon. And so that could also have potentially some impact on how we look at project execution. And lastly, the labor challenge, which I'm assuming will be less as we go forward.

So putting all of this into picture, have we managed to negotiate on all our contracts, to get cost overrun spot and assuming execution timelines, of course, will get pushed out. And if that's not the case, how do we look at provisioning cycles through the year?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [33]

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I think let's be positive on this. We knew this corona was hitting us. And I think as a management, we were agile and agile enough to get back to all our sites on what to do and what not to do. Luckily for us, the company is split up into various verticals, though, on an overall basis, there could be about 9 50-odd sites, India, international put together.

And if you look at it IC wise, some ICs are just 30 sites, some ICs are 60, 70 sites, some ICs are maybe 200 sites, but one could do that, including some of the workshops where contracting work is taking place in terms of fabrication, et cetera, one could do that.

And since there is also a fairly good robust risk management process within the company, broadly the kind of contractual obligations that we have undertaken in terms of what kind of risks we have, in terms -- may not be in terms of pandemic, but in terms of some stop down, et cetera, were rather clear. In some contracts, it could be hazy, but most of the contracts are very clear.

So we did 2, 3 things immediately. Number one, we went back to all our sites to read the contract and write the necessary letters to the client because as you know, in a contract, there's not only an obligation from our side, which is tripping, it is also an obligation to the client consultant, which was not coming through. Because they were also working from home, were not able to work, et cetera, et cetera. They are not coming to the offices. So they need to give us drawings, they need to approve something. So that process is also on. So it's a trip from both sides and therefore, in many cases, either the force majeure clause or certain clause towards that we are idling and we need to be compensated, et cetera, have been taken up. And that's work in progress as to how to get the cost reimbursed.

At the same time, within the company, I think we put up an elaborate structure in place that start process within various ICs, to look at how to optimize resources, to look at how to ask certain people who are service provider, others to stay at home, to ask discounts. The prices have also come down. The commodity prices are coming down, the oil prices are coming down. That means the logistics and production costs will come down.

On a high charges point of view, we said the equipments are idling. So give us discount or take it away. We've been -- though we have managed their labor for much of these months, there's also dictate from the government and the Ministry of Home Affairs that much of the client should reimburse this. So there are letters from most of the clients and some clients have even started paying us in terms of reimbursing the labor based on record, et cetera, that we are showing, collecting and proving into them and such.

And so I think it's a fair play on. There is -- at the end of the day, there's a disruption but from a cost point of view, yes, the fixed costs would definitely catch up. But that has to be rubberized or performing better in the next 10 months, the 9 months that is available. How much we will be able to catch-up is what we need to arrive at in some format within the next 30 to 60 days. And we are not able to gauge it right now.

Monsoon is a factor but of late, we have learned to live with monsoon. We've learned to work with monsoon unless it's very heavy in some parts of the country, then the work does get affected for a few days. But other than that, work goes on in monsoon. Maybe if you are pouring ex concrete per day, maybe it's slightly less, but at the same time, we work extra shifts, et cetera, and work goes on. Because it's also a good time to do the work from the climatic point of view. And therefore, overall, one -- I don't think one needs to unduly, what you call, put a measurements here that something is totally gone wrong.

But there would be a lot of discussions. There would be a lot of give and takes. There would be a cost that has built up, which needs to be rubberized over a period of time. And that cannot be helped. But at the same time, I would think that the -- it's a very remarkable change in many government agencies, maybe because of the central government to dictate that most the state government, central government and public sector units are being very fast to make earlier payments, to look at reimbursement of certain costs, to admit contractual clauses, not necessarily a force majeure, but even of disruption or nonworking and trying to see how to provide for some cost reimbursement. We may not get what we need, but that -- there is a process involved to get something, it's fair enough. And maybe we'll also have to improve our productivity and speed our work so that some of the sales, which I would say, are still in the backlog, which could not be done during the last 2 months, can be done to get something back.

See, the biggest point with an organization like L&T, is the brand evokes trust. It's an 82 year old brand. We're known to perform. We have done things. So therefore, most clients look at us as, yes, disruption took place, but this company would catch it up. They would finally keep up their obligation. We could restart whatever we need to do on time. And therefore, with that trust, I think most clients come back to us to see, in a positive mood, to see how to also assist us, to pick it up well.

There was a client in Maharashtra, who's come back to us and say that he will take care of all the labor wages for the next 3 months, just get the labor to site. He has said he will fund the food for all the labor, just get the labor to site. So there are clients who are extremely positive on us. And therefore, most clients are, I would say. Few are neutral, I wouldn't say any client has been negative so far. So we will get over it, but it will take some time.

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Venugopal Garre, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [34]

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It's good to hear, actually. My second question is again on government, a very small qualitative question. We just wanted a read from you on one aspect.

There's a balancing going on. Government seems to be keen to revive the economy. Of course, they do have challenges on the fiscal side. When you speak to state governments and central governments, are you seeing any urgency from them, at this point of time, to kick-start new projects in terms of tendering or also pushing it to execute where sites are open, which, of course, means cash flow side?

And more importantly, things like the renewed focus on defense, Make in India, et cetera. Will it finally lead to any large projects coming in the pipeline? That's it for me.

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [35]

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Okay from the speed point of view, there are government agencies, both public sector and predominantly central and some state governments, urging us to get back to sites and push the projects. I wouldn't say everybody is doing it. A few of them are worried, few of them are worried about budget. Naturally, much of their revenues have also gone down terrifically in these 2 months. And therefore, I guess, they're also scratching their head as to how to go about it, what to do about it? So some states, I would guess that, there will be issues, but many other states are positive.

It's very surprising there's states in the eastern part of the country, Northern and Eastern part of the country, North Eastern part of the country, seems to be wanting to hurry it up. Seem to be wanting to really hurry up. Maybe they have been affected less with the pandemic and they see also the labor coming back, and therefore, they feel the situation where much of their migrant labor will come back or got to be given employment. And therefore, they see it's worth a panacea for that problem by seeing that work goes on faster.

So we have letters, we have phone calls. We have local discussions on how to speed up work on basically the Northern and Eastern part of the country, which is a substantial part of the country. But the bigger part of the country, from our point of view, the rest of the south, where much of the backlog is and there, the key problem is though the clients would want us to proceed ahead with the work, the key matter is how to attract the labor to these places back again. Because a huge amount of labor has gone back to the North, Central and East. And to get them back, with the psychological cloud hanging on with the pandemic, is a challenge in front of us. So if we can crack the formula, I think we can get moving there.

No government, or no state or central or public sectors come back to us saying, stop the work or we're going to defer the work, we're going to postpone the work. There have been no statement like that. So far, there's been no letters like that so far. We need to, as we get into the work, look into the amount of budget allocation that has been done and whether these budget allocations are valid and whether it is for the year and then do the work according to that.

Luckily for us, most of these contracts have price escalation and process towards time escalation and so on and so forth. And therefore, assuming what needs to be completed in 2 years, it takes 2.5 years, we would get reimbursed from a cost point of view. But that we are spending 6 more months, is maybe a little bit of a heartache, but I think one needs to look into the situation from that point of view.

Now on the second question of yours on the defense side. There has been a major liberalization, which has been done, though principally, I don't agree to that from an organizational point of view and personally on the liberalization that we have done. We have increased the FDI from 49% to 74%. Most countries have an indigenous defense industry, which is highly protected even if the FDI has improved to 474 or whatever, I don't think any foreign government -- foreign company is going to come here and put into play technology from a high-tech point of view to -- from a defense source point of view or from a national security point of view.

There will be more doing fabrication or offsetting kind of work or some low-end CKD or assembly kind of work. And therefore, that kind of liberalization, I don't see where it goes, except for the fact that you'll be will get an announced collaboration with some foreign names. But that will be low end facility, what we call assembly, et cetera, and not real true manufacturing or high end defense capability. So we have, as you know, probably the largest defense manufacturing capability in India. That program is going decently. But the money allocated in defense is also under strain. Because generally, the fund availability, defense is always considered an expense, which has to be there, but which should not be there. And therefore, that defense side always struggles with the requirement of fund. I call it the permanent start-up. So it will continue in that manner. I don't see any major change coming up there.

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Operator [36]

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The next question is from the line of Sumit Jain from ASK Investment Managers.

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Sumit Jain, ASK Investment Managers Limited - Portfolio Manager [37]

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Is there a risk to the consideration to be received from Schneider based on certain milestones? And because the performance naturally will be muted during these times?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [38]

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No, there is nothing like that. It's a straightforward deal. There's a consideration and a business transaction agreement is signed. Now we have to full -- there are some conditions precedent as we go forward. Essentially, as I said before, it is on the transfer of properties, it's transfer on the innovation of agreements and the regular few other -- the transfer of some of the vendors and wholesalers and retailers and that part is going on. And beyond that, there's nothing else in the agreement. It's a straightforward agreement.

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Sumit Jain, ASK Investment Managers Limited - Portfolio Manager [39]

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Sure. And during these last 3, 4 months, what is your experience in the Middle East geography, which is dependent on, broadly, oil and gas? In terms of closure costs, in terms of receivables, collections. And with our past experience of what has happened with hydrocarbons previously with us, do you see those risks coming and hitting us going forward?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [40]

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I'll answer the second part of it first. Hydrocarbon went through problems. Many of the L&T businesses we went abroad have had some problems initially. Hydrocarbon has had its fair share of problems. We've got a great leadership and one of my colleagues there, Mr. Subramanian Sarma, has got a good set of people whom we have brought in now to strengthen the organization, not only from a managerial point of view, from a risk assessment point of view, from an execution point of view, from a client relationship point of view, engineering point of view, so on and so forth.

I think is a robust and extremely good setup as we see it. It's a fantastically good fighting commando force. It's done very well the last 3 years and it continues to perform well. Hydrocarbon has got a backlog of roughly about INR 50,000-odd crores as we see it. 50% is Middle East, 50% is in India. Therefore it also balances. And from a Middle East point of view, most of the contracts that we have are rigid contracts, good contracts and very essential contracts from a future production point of view. Because some of the wells are going down, therefore, they need to have this to keep the production from the future point of view.

And so these jobs are all going well. Where the problem will come as we see it is, future proposals, future contracts from Middle East. That may see a slowdown immediately. As I said, when you read the government report, the [Ramsey] report and many other reports that are privy to many of the details, which we may -- may not be aware and, which have much better research and such as data scientists associated with them from a research point of view, you find that the oil prices are expected to come back during the later part of the year or the last quarter of this year. That is January to March.

Therefore, we hope that these prices come back. Also, the oil-producing countries, OpEx plus, as they call it, which includes Russia and Venezuela, et cetera, have cut down oil production by 10 million barrels. Roughly about 100 million barrels of oil have come down to about 90 million barrels of oil.

They also say that due to the present low prices, the shale and the Venezuelan hard and in the North Sea, some of the rigs are getting, what we call, decommissioned. And therefore, there is a natural tendency to lower the oil production even from where it is today, it may come down to 70. As such, at the moment, oil consumption has gone down. But once the world comes back to normal -- the U.S. economy has suddenly generated 2.3 million jobs. Even in Indian economy yesterday when you see -- you saw some green shoots of economic activity, again picking up. Therefore the world is coming back to order, and let's pray to God, there's no [doubling] of the pandemic. And assuming all that happens, I feel the Middle East will come back from a hydrocarbon point of view. And therefore, I'm reasonably confident about it.

From a Middle East spending point of view, yes, due to the lower oil prices, you may not find sufficient proposals during the Q2, Q3 time. But I guess it will come back during Q4. Much of the infrastructure that needs to be created have been done. But surprisingly, what is happening there is suddenly as you see a spend towards social infrastructure. That means power transmission distributions, water jobs and some pipelines and such. And therefore, we will try to capitalize on those opportunities that is available as we move forward.

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Operator [41]

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

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [42]

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2 questions. First, in terms of the execution expectations, you refused to give a guidance, and rightly so. But could you give us a sense as to how many of the infrastructure projects or percentage of projects are funded through the MFAs, central and state government exposure or private sector exposure. We're just trying to understand what proportion will remain steady despite all the economic challenges that we see.

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [43]

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As you see, about 80% of our projects are central government, public -- state governments and public sector units. And in this 80%, about 35-odd percent is multilateral funded agencies, like [World Bank], Asian Development Bank, so on and so forth.

And the rest is -- that means 50% are funded directly through the state and central government. As I see it now, we don't see any problem anywhere. The 1 problem that there is Andhra Pradesh, which we believe is more political in nature rather than economical in nature. There was a change in government, and they had some tribulation whether the capital should come up at Amaravati or some other places. The present regime has declared 3 capitals and maybe the confusion created out of that, they decide whether they needed a capital in Amaravati. And much of the projects that we're doing was towards the capital city development. So we have decided to withdraw from that. We enrolled out of all those backlog that we had and some money to be collected, we will do that over a period of time, we have started receiving it, we'll continue to receive it.

There has been some disruptions in Madhya Pradesh, Rajasthan too. Again, change of regime. And more to do with allocation of funds and reprioritization of projects. Somebody said, let us do the waterline there. Somebody said, let us do the electricity substation here.

The one problem that is there is Uttar Pradesh, which we believe is more political in nature rather than economical in nature. There's a change in government, and they had some tribulations that the capital should come up at Amaravati or some other places. The present regime has declared 3 capitals and maybe the confusion created out of that, but they decided whether they needed a capital in Amaravati. And much of the project that we're doing was towards the capital city development. So we have decided to withdraw from that. We rolled out all those backlogs that we had and some money to be collected, we'll do that over a period of time. We have started receiving it, we'll continue to receive it. There has been some disruptions in Madhya Pradesh, Rajasthan too, again, change of regime and more to do with the allocation of funds and reprioritization of projects. Somebody said, let us do the waterline there. Somebody said, let us do the electricity substation here. These things will happen. We have not seen any cancellation or go-slow on the projects. We have reconciled many of these matters, and some of these projects have started moving, and cash flow has also started.

I think the government generally realizes that the key challenge in front of them to keep the economic activity going, to keep the nation at large peaceful, the most important thing facing them is the creation of jobs. So as you can see, huge money has been allocated (inaudible), what's the main purpose towards that? The sufficient contracts are not available, therefore, the labor that is free, the regiments that are free, labor that is migrating back from the west and south into the east and north, have to be given jobs. And contracts take time, 3 to 6 months, for even the best of fast procedures to happen to steadily even a INR 500 crore job or INR 1,000 crores job because that has the procedures involved whereas an end regard is something which can create a job. So in my sense, as I answered one of your colleagues previously, there is an urge in northern and eastern areas to quickly push ahead of the project even at a faster speed because that will give employment to the people who come back and who are local, but who had migrated and will now come back. Therefore, I feel with this broad thoughts in mind, maybe new proposals to come may take certain time but existing promotions to push and fulfill and to fructify, I think there will be a hard pressure to get going on it because that gives employment.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [44]

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Sir, my second question is on the working capital plan. We understand that you've managed it pretty well despite the tough scenario and the lockdown period. But still Q3, if we look at the commentary and the data for the Q2, which have been disclosed in terms of receivables, it had been declining and the entire increase in working capital was due to the vendor support that we had given. Whereas when we look at the balance sheet data for now, the receivables and other current assets have gone up sharply. So has there been any change in payment terms or project parameters that has led to this?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [45]

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Shankar, can you take that?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [46]

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I'll take this. Actually, it's not only what has fallen due and not collected. Many of the contracts, there is also a milestone up to which we continue to invest money, progress the project, reach the threshold for invoicing and then you're hard to invoice. Over the last 2 years, there has been a shift in the trend that, increasingly, the clients have gotten used to using the balance sheet of the contractors. And to that extent, in terms of the contract have gone a little biased towards the customer. The milestones, which used to be frequent and -- to each other have got elongated. And secondly, we also have gotten larger and more complicated orders as compared to the past. So consequently, in the larger orders, the milestones are so defined that you need to first invest the money, reach the milestone and then release the invoices. The nature of overdue is that its due dates have gone past and customer is not paying, that has not deteriorated. We still continue to operate between 50 days and 60 days sales in those overdues. Out of the total balance (technical difficulty)

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [47]

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Shankar, your voice is getting cut.

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [48]

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Better now?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [49]

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Yes, slightly better.

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [50]

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Yes, okay. So what I'm saying is, if you look at the balance sheet, out of the INR 55-odd-thousand crores of dues from the customers, about INR 19,000 crores is what is overdue and that includes retention as well. And retention, as you know, is linked to performance confirmations and completion testings and stuff like that. So these are all very laborious process in project business. So to that extent, I want to say 2 things. One is, I don't think there is deterioration in the quality of customer receivables [of volumes], they still continue to be around in (inaudible). And secondly, the nature of the contract that we execute from time to time, will also could have (inaudible) in the balance sheet.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [51]

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Sir, in that context, this is a continuation for it. How do we look at working capital in the coming period? I know it is difficult period. And in terms of -- as well as some of the cost reduction measures that you would have taken, if you can spell out that, it will be helpful to -- for us to model it?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [52]

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Shankar? Shankar your voice is totally gone.

(technical difficulty)

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [53]

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Sir the question is in continuation to the previous one that any cost reduction measures that you would have taken? Or in terms of working capital, how do you see it whether our targets, which were there in '21, how do we look at that at this point in time now?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [54]

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See, we are a little short on data points to fix an exact target, but a very simple grandmother's recipe we are using that we collect and spend, collect and spend. So to that extent, I don't expect as earlier mentioned. I don't expect working capital to deviate from here. Because I think we are going to keep circulating the capital and at site level, we have cascaded the message that the money that will be spent in the science is proportionate to the money that we collect. So we are now also trying to talk to the customers, and they are in a bit of an appreciative mood now, given the situation that all of us find ourselves in. And we are trying to loosen up some of contractual terms to enable us to get some initial funding to be able to recommence the operations. So I think it's a question of both very engaged partnership with the client in order to deal with the working capital situation. So I think at the later period, maybe a month or 2 down the line when we are clear about the revenue trajectory, we'll also be clear about the working capital trajectory. But suffice to say that I don't see going south from where it is today.

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Operator [55]

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The next question is from the line of Bhalchandra Shinde from Max Life Insurance.

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Bhalchandra Shinde, Anand Rathi Financial Services Limited, Research Division - Research Analyst [56]

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As we are aware that there will be a limited budget opportunities for most of the state and central. And as we mentioned in the start, related to national infrastructure pipeline. Can we gauge with -- like which projects can be prioritized over the next 2 years to achieve or to be online on that target?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [57]

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I couldn't get your question. You've got to be a little more specific about it.

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Bhalchandra Shinde, Anand Rathi Financial Services Limited, Research Division - Research Analyst [58]

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As per the sectors-wise , which sectors will be prioritized there because of the limited budget available with the state and central from the national infrastructure pipeline, so those pipeline can be seen as a good prospects over the next 2 years?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [59]

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I look at it in a slightly different manner. And most states realize that, let's say, economy be where it is right now, let's say, the life. I think now that, that part is more or less achieved, the thing would get back to saving the economy or reviving the economy. Much of the states cannot last without it because there are huge commitments, both in terms of their own payment as well as many social and other commitments that they had. I think third is most governments, central and state realize that one way to get back to power is by creating employment, the self-respecting Indians and employment is paramount in everybody's mind. And you could see from the present central government's way they've gone about, there's more about empowerment than entitlement. There's been some entitlement, of course, because the very needy had to be provided for through direct benefit transfers and such. But much of the money was through NREGA or various other forms upheld by giving loans and facilities to micro-small industries, moratorium and payments so on and so forth. The whole idea is give employment to people, they will find jobs, they will get back. So with this in view, I find that -- and also, if you look at from an overall budget point of view, states have been allowed to draw 2% more overdrafts from there. There's a bank but with certain carriers. INR 90,000 crores of money has been given to the discounts. And with all, there will be liquidity, which is possibly created in a system may not be the kind of liquidity that one wants, but definitely liquidity from that point of view. It's not necessarily a revenue liquidity, maybe it's a debt liquidity. But having said that, the necessary infrastructure for creating liquidity has been created.

Now there are many projects which are also awaiting clearance of multilateral funding agencies like World Bank, ADB, African -- not African, this Chinese bank, I forgot the name of it, and also the government-to-government financing and so on and so forth. So these will see the light of the day. Now this is going to happen tomorrow, next month, within 2 months, I'm not sure, but this will come back in some manner or the other. Now we did some calculations internally. It's not that the central state and public sector they're not going to spend, maybe if they're spending $7 billion to $8 billion previously, it might have come down to $5 billion, so $3 billion they get. So not -- the priorities will be different. For example, they would look at rural electrification, rural water projects. They would look at the roads to hinterland because the goods needs to be transported. Creation of retail avenues for -- now the food grains and others can be sold across the country as a major liberalization that have come, and pharmas can sell and produced anywhere in the country. And need not go through the exit price, MSP and so on and so forth. The necessary storage in other facilities have come up. We'll have to wait further. We're not going to be opportunistic, but we will look for opportunities and if there are good opportunities, we'll definitely go behind it. So that's the way we look at it.

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Bhalchandra Shinde, Anand Rathi Financial Services Limited, Research Division - Research Analyst [60]

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And sir, on the metro project side and even on the high-speed rail, how we see those projects panning out, especially high-speed rail also, which has been on the back burn for Maharashtra government and even on the central government side?

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

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See, on the metro projects, there's a national policy that every city with more than 1 million population will have a metro. And as you know, in the last few years, many metros have come up across the country. Much of these metros are hardly 20% funded by the state government and the rest of it is funded by either a loan from JICA, JBIC, World Bank or sometimes even ADB. But -- and with some funding or as a viability gap funding from the central government. So these projects will continue to grow because, one -- it's not enough if you do a line, there'll be always pressure to do multiple lines so that people from multiple points can be taken, brought in hub-and-spoke and such. So those metro projects will continue. High-speed, I have my own doubts. It is a bit of a costly project. And to do that kind of a project in this particular season when you have constrained your budget and such, I'm not sure that project will go on, though it is heavily funded by JICA, I have a feeling that project may take a bad burner. That's my gut feeling. So let's see how that goes.

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Operator [62]

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

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Ashish Shah, Centrum Broking Limited, Research Division - Analyst of Infrastructure and Airlines [63]

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Yes. Sir, you spoke on defense as a space, but specifically referring to certain changes done by the government recently, has the reserves some 26 items for domestic procurement. Anything concrete that we believe we can benefit from that?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [64]

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I think the key thing is the strategic partnership. The government went with this policy of identifying strategic partnership. The principle behind is that you can't have 5 people making tanks in India or 5 companies making the (inaudible) of India, 10 companies making something else in India. The idea was sharing, if you have 1 out of -- there's 2 partners, who will make certain, very high-end defense item, let's say, a tank or a main battle tank or a submarine or an FF carrier, whatever it is. Because you now look at these ideas, we make submarines. So if it is that we get 1 set of submarines and after 5 years, we don't get the next set of submarines, we're going to have 2 companies in the country making submarines. And as the third tender comes, and there's a third-party coming in, and in a country like us with not so many submarine requirements, you can't have 3 companies making submarines. You can have at best 1 or 2. So that is all -- and why does it help because if L&T is making submarine, it's just not making submarines, it's investing in an ecosystem of vendors, it's investing in research, it's inventing new methods to do it, it's doing low cost, making India stuff, it is training our own people, so on and so forth. And you can't lose this NDA train set of people into fabricating something else tomorrow because the submarine does not count. So the idea was strategic partnership. I think that has started moving and that's a pretty good news from an overall welfare or the defense, or the goodness of the defense point of view in our opinion.

The second is this FDA policy, which is in one way good that from foreign companies (inaudible) does not think in that terms of taking private sector around the (inaudible) and then cusping it to create a solid defense industry sort of an environment by which continuous developments and new products are introduced to predict the organization, this will not go further. I hope somebody is thinking like that, it's not enough if 2 people like me scream around about it. That's the national policy. That's the natural requirement. They need to see the imperators of having 2 very highly armed neighbors around us. And from that point of view, I think with the country's economy being what it is, sufficient funds as they see and being fit is being allocated. But I guess it is not enough from an overall standpoint point of view. So we need to look at it from that overall perspective.

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Ashish Shah, Centrum Broking Limited, Research Division - Analyst of Infrastructure and Airlines [65]

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Sure. And second one is on the AP, you did touch upon that as you canceled the older orders. So presently, none of the capital city projects continue in our order book, can we take that as a position? And secondly, you did mention about certain receivables, which you will get over a period of time if you can quantify that, that will help?

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

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The fact that none of the orders continued in our book is right. But from an accounting point of view, since we have some receivables, something has to be kept alive and that is kept alive from that point of view. We don't give specifics of what is due from where, therefore, I'd like to avoid it from that point of view but there's nothing to be overall worried about. Let me also clarify that.

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Operator [67]

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

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [68]

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Sir, my question is mainly with respect to low commodity costs. How big a benefit could it be for us over the next few quarters? And what proportion of our orders would be having pass-through clauses?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [69]

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Almost all the contracts are pass-through clauses. And even if there are lump sum contracts without the separate escalation clause, the escalations have been calculated and provided for in the contract value that we have got from the clients. And therefore, if the prices do not go up, that's the savings that is available. If the prices go up, that's cost that has been provided for, which is spent. And therefore, to a large extent, I can, with absolute reassurance, tell you that most -- almost all the contracts have provided that. And without that, it does not go to the risk (inaudible) within the organization. And therefore, that's the way it is.

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [70]

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Does that imply, sir, that with commodity costs being lower, that advantage should be largely retained by the company?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [71]

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You're right, absolutely right. But we got to see whether there's any other increase in cost. Labor is going to be a shortfall as we see it, skill labor is going to be tough to get, maybe there'll be some little bit premium of -- premium on labor cost. I do hope the oil prices continue as it is. I hope there's no other major disruptions in supply chain, et cetera, that we have to cancel an order somewhere and go somewhere else. But to a large extent, these are limited and not negligible and does not cause one to lose sleep. So we should be having some efforts to save on some of these matters and real good effort is going on within the system to capture whatever we can.

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Aditya Bhartia, Investec Bank plc, Research Division - Analyst [72]

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Understood, sir. And sir, you explained about the Andhra Pradesh. From Maharashtra Pradesh, where also we faced certain issues initially with the change in government, is everything now settled over there? And execution is -- I mean once these forward issues have resolved, should execution on those projects be at normal pace?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [73]

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Maharashtra, we never faced anything due to a change in government. What happened in Maharashtra was 2 of the most prestigious projects we're doing there is the 2 packages of coastal road and there's metro project there. So a lot of public interest litigations and unnecessary litigations from various points of view. Somebody objected saying that the coastal road is spoiling the fish livability there, somebody said it's spoiling the corals the sea, somebody said his house view is getting affected, somebody said there's [noise], which as in 1840 Act is slightly more than what it is. So we had to go through all that, and that was not anticipated that by -- when they know that they're getting such a good facility would object to that. So we have passed through most of it. We went after the Supreme Court to get it cleared. The last 6 or 7 months of good working in the previous year. And this year, even during the corona season, if you are a Mumbaikar, you would have seen the costal road works going on, the Trans Harbour work is going on -- going around. Metro got affected the last 14 days because one of the contractors in another package had 25 or 30 of the people COVID positive test, none of the people in our sites have tested positive. But we also had to stop the work because the administration got a bit panicky on that. But other than that all works in Mumbai area is going on, but not at the speed at what we want because of labor shortage, but -- and let's hope that we attract the labor back to pick it up.

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Operator [74]

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The next question is from the line of Keshav Lahoti from Angel Broking.

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Keshav Lahoti, Angel Broking Private Limited, Research Division - Analyst [75]

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Sir, can you please guide me like, as we know, like 20, 30-odd days of work were not going on due to not down, what would be the proportion of fixed cost on the basis of revenue for core E&C business?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [76]

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Shankar?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [77]

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Keshav, it is -- generally, if you look at expenditures of the company, the staff cost is around 5%, 6% of the revenue on an annualized basis, I am saying. And the other administrative costs around 3%, 4%. So put together, about 10% of the revenues goes in form of people and all the administrative costs that we run, that's the [sum]. Now project to project, sector to sector, vertical to vertical, it could vary but this is something at the moment since we have not been able to exactly quantify what is going to be the revenue impact, how much is going to be the catch-up, et cetera. At the moment, you can take it as possibly 8% to 9% of the revenue lost would be the cost that the company is carrying forward.

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Keshav Lahoti, Angel Broking Private Limited, Research Division - Analyst [78]

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Okay. Is it possible for you to quantify how much proportion of your order book is from Maharashtra?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [79]

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Yes, around 22%, 23% of our order book is from Maharashtra.

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Operator [80]

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The next question is from the line of Varun Ginodia from AMBIT Capital.

As there's no response, we'll take the next question from the line of Priyankar Biswas from Nomura Financial Services.

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Priyankar Biswas, Nomura Securities Co. Ltd., Research Division - VP [81]

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So I have just 1 question as most has been answered. So what I wanted is, like, in your ex services segments, so which are the segments which have been worst impacted by COVID and which has been least impacted? If you can like put in an order, like maybe the top-most impacted and least-most impacted? And where we are seeing utilization levels, let's say, coming back more faster than the others among the segments, if you can shed some light on that?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [82]

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Are you talking about the services segment?

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Priyankar Biswas, Nomura Securities Co. Ltd., Research Division - VP [83]

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No, no. Ex services, excluding the services?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [84]

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What do you say, I think, the business that got a better -- how do you answer this question? We have a backlog of INR 303,000 crores. So all the businesses are very healthy backlog at the moment. And all of them are proceeding with the work. So nothing has got impacted. The impact has been 2 months of severe lockdown like nothing else in the world in our country. And therefore, across the sectors, we've had a lockdown and not much work is progressed, but the engineering procurement and certain basic activities to protect the sites from natural calamities and such. And therefore, once -- now that lockdown is getting eased, we have started activities, as I said, 90% of our sites are back, but laborers are only 40% when we need to pick it up. So from that point of view, we are a healthy organization. There's a very few organizations in the globe which can say they have a $45 billion backlog, and that's what we have. And therefore, I don't think there's a cost to -- all of our workshops have work till September '21, the big complex at Hazira, the power complex, the Telecom, the (inaudible), the (inaudible), except for the Kattupalli shipyard, where we are desperate to get some different orders but even the yard there has got work till September, November '21. So we have enough work on hand. That's not the issue at all for us.

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Priyankar Biswas, Nomura Securities Co. Ltd., Research Division - VP [85]

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Sorry, sir, I'm just reframing the question. So what I meant is like right now with the unlock thing happening. So what I meant was like which segments are maybe ramping up faster than the others? So like, for example, let's say, heavy engineering could be doing better than the infrastructure segments like power T&D, heavy civil. So that sort of the thing I was asking.

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [86]

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Sir, trust and believe me, the biggest advantage of L&T is its verticalization, either it's an IT inside or it's a listed company outside. Across the board, the IT head or the CEO of that setup, including his team of top management is going all out to revive the sector. So across the board, we see work happening and people trying to push. So I wouldn't be able to rate somebody's doing better, somebody's doing less better. It's a question of somebody getting laborers little faster than the other, somebody getting slightly more skilled laborer, somebody holding some more in his camp, that's a very marginal difference. Everybody is going all out to get his team back to push the work, and that's across the company.

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Operator [87]

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Next question is from the line of Amit Mahawar from Edelweiss.

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Amit Mahawar, Edelweiss Securities Ltd., Research Division - VP of Institutional Equities Research [88]

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Sir, 2 quick questions. First is on overall market capacity and consolidation. Do you think in the coming quarters and years, we will see a much greater consolidation of market opportunities in the domestic market? Because if you actually see peer set for L&T, the profile of most of them is getting much broader. And our focus has been towards balance and cash flow as reflected in past couple of quarters. So do you think you will have a much stronger consolidation of market share? It's already reflecting in some of our segments where we have a much higher share versus all the conventional segments? That's my question number one.

Second is, sir, more on reimagining the project sites. No one knows what kind of disruption -- what's going to be the disruption cycle in project sites. You will have demobilized and demobilization of -- and social distancing costs. So do you think the contractual terms needs to change with the top clients, at least top 50, 100 clients? And as a sector, also, do you think there will be critical changes there? These are my questions.

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [89]

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I think the second question, I did answer earlier to one of your colleagues who was on the line, but I'll try to give you a short answer. On the first one, the market consolidation, you've got to look at it from a point of 2 use. Number 1 is, much of the competition is under terrific stream from a balance sheet point of view, heavy debts, poor cash flows and so on and so forth. Including many of them have gone into -- very heavily into HAM and BOT projects and have huge debts on their books. And with this 2, 3 months of lockdown, collected provision tolls to repay back the debts and interest thereon. They are not aware, but you do see the deterioration from their point of view. Now this will continue to happen because that's the way they have taken those contracts and such, I cannot comment beyond that on that. What will happen is because of the inability to sometimes bid for large projects, et cetera, we maybe tend to get a higher share of the market but that will also go through a process. Because in India, normally, a single bid basis is not accepted, the client will -- mostly government clients, especially government clients will call for a bid to rise or will hard negotiate with us to accept a certain price, they consider the budget. So it makes life a little more difficult from that point of view, but it's also good from that point of view that we may have as a sunshine for some time at least. So that hopefully answers your first question.

Now regarding consolidation, I'm not very sure. There have been at least 4 or 5 of those construction companies who have come back to me saying, can we buy them out? We are not interested in any M&A in this space. I think we have a good backlog. We need to take that forward from various points of view. And some of these other construction companies, we know the type of contracts they have taken and what price they have taken, what kind of obligations under which they have taken those contracts, so we would avoid any M&A in that particular place. So whether they consolidate among themselves, I cannot comment on that again. So from a sites point of view, I did tell your colleague earlier and don't mind repeating it. As I said, we have about 120,000 labors in our sites right now. We need to get it to 220,000, 230,000 for -- to what end the pre-COVID kind of good activity that we had. So every effort is being made to do that.

Yes, you're very right that due to the prevailing circumstances, it's extremely important to have proper safe working conditions at sites. So huge elaborate standard operating procedures have been done for working from offices, for working from project site offices, from working at sites so on and so forth. So the productivity will not be as much as set out to be because of the social distancing as such. You can't pour concrete or do bar bending with social distancing. People have to be together to carry the load or to place it or to tie it, et cetera. So that there will be some, let's say, follow-up there. But what we are trying to do is, we've been talking about mechanization for a long time. And what we ended up doing is, we mechanized and we also had the labor. So now we are getting back to the -- many of our people saying that, listen, at least now you get back to mechanization, improved productivity and so on and so forth. One of the good things that is happening is also due to lack of projects in Middle East, many of the companies there are not doing well, et cetera. A lot of labor who are much more productive, much more efficient and maybe used to better ways of working from Middle East are coming back. We'll try to attract them back to the domestic sites now that they don't have work in Middle East. And that will bring in better work methods and more efficiency and productivity into the sites. The combination of this should help but the fact remains that standard operating procedures and norms look good on paper and attractive, it is going to be difficult. So I don't want to shy away from the answer that life at sites is going to be a little more difficult than what it was originally because you can't work in those conditions to your optimum.

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Amit Mahawar, Edelweiss Securities Ltd., Research Division - VP of Institutional Equities Research [90]

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That's helpful. Just if I just have a follow-up on that explanation only. We'll basically proceed on execution, or we'll first clarify with all major clients on all major sites? Because a lot of costs, they cannot compensate. So even if they say they will compensate, practically something a lot of what we will incur might not get compensated. So just to safeguard ourselves, do you think we will more be hell bent because L&T has been focusing very well on -- with preferred cash flow over growth also we've seen in last 10 quarters. And likewise, in profitability also, our fair share of profitability to claim that back. Do you have something in mind so that we safeguard our profitability? That's my point.

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [91]

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I'll answer this question like this, only companies that have survived such a situation is the ones that have cash in hand. And therefore, our dictum to all our site managers, accounts and project manager is very clear: save cash, sales will come, progress will encourage. This dictum has been repeated thousand times by me and Shankar. And I guess it is recorded very well in the mind, and they know it when they get up, when they go to sleep or even in their dreams. And it is known to all the people at sites. This message continues to be given. Now also in times of natural disasters, pandemic, et cetera, fear, et cetera, people will always migrate to organizations, brands or good names whom they trust. In our case, it's an 82-year-old company with a brand that is highly reputable, and it has always done things on time to quality. The clients look forward to holding our hands now to help us out in such circumstances. And they cooperate with us to see how together work done because we'll be one of the few organizations, which will want to get work done from that point of view. And therefore, I see in most of the cases, the clients wanting to help us in some manner or the other. Even government clients by easing out contract terms, by taking decisions which are not contractual. Pre-COVID, they would not have taken such decisions, but today, they're taking such decisions. Yes, of course, there would be some public sector and government clients, who will be stuck-up about it. But then what we need to do is we need to show the good examples of what has happened in AB, CD, EF, GH clients and tell them XYZ, please there's a precedence. One of your sister companies within the same government has done it, one of your governments in the same country has done it, so why can't you do it? (foreign language) So this will take some coaching, some amount of positioning, some amount of, what you call, leveraging. But trust and believe me, we are used to wait, and we will get it done.

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Operator [92]

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The next question is from the line of Nishant Chandra from Temasek.

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Nishant Chandra, Temasek Holdings (Private) Limited - Associate Director, India [93]

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So I'm just looking at the company's forward-looking view in the context of where the journey has been over the last 4, 5 years. So when we look at the EPC business at least, the ROE has improved meaningfully over the last 5 years, perhaps at similar or low margins. Now as we stand today from an order book perspective, as your (inaudible), I think we are well positioned. So would it be fair to say that as we look forward in incremental bids, we should see some element of stronger margins, especially for sectors like infrastructure? Because I mean, there are a lot of uncertainties in India if you look at the last 3, 4 years, starting from demonetization to GST to NBFC issue to elections and now COVID. There's been no sort of let-up in sort of unforeseen circumstances. So do you start pricing that in into your bids going forward in a greater manner?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [94]

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Shankar?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [95]

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The margin play is not simply the demand and supply. So most of the bids that we submit our prices are also in the context of the budgets that get approved by the customer with their respective boards. We have had instances where we have been L1, but the prices have exceeded the customers' budget, and hence it had to be rebid. And it is actually a loss of productive time and money, effort to get in the rebids. So I think the effort would be to operate at profitable levels. It will be difficult to put a number to say that we will accept bids only which gives me 12% margin or -- et cetera. There is a floor in the cap within which we operate. And if you see over the several -- past several seasons, despite the cyclical -- business cyclicality, they've been more or less stable in our margins. And so I think that strategy has worked well, but we don't want to fix something that's not broken.

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Nishant Chandra, Temasek Holdings (Private) Limited - Associate Director, India [96]

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Agreed. No, I think my question was also in the context that if you look at it -- us in 5 years back, there was some competition. Now even those competitors who were there in the last 3, 4 years, they've also gotten washed out, including some established names. So I was just wondering whether that's...

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [97]

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Yes. Affordability is also an issue (inaudible)...

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Nishant Chandra, Temasek Holdings (Private) Limited - Associate Director, India [98]

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Fair point, I understand. The second one is in terms of the consolidated ROE target of 18%, which was articulated a few years back. So at this stage, I think there may be some sort of timing challenges. But is it fair to say that if you were to look at that as a cutoff, would financial services, development projects, power development and Hyderabad metro be the 4 large things below the 18% threshold today?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [99]

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Financial services have been managed, but for the current year where there was some specific provisioning. Financial services almost touched 18%. They're one of the first ones to touch 18%. Very accretive investments like Nabha, Hyderabad metro will have a challenge, and that's why we want to unlock the capital. But we have not lost heart. We've been pushed back in time for our 18% ROE, but we will continue to plow along and figure out the solar, we get some divestments going. Possibly, we will touch there.

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Nishant Chandra, Temasek Holdings (Private) Limited - Associate Director, India [100]

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Understood. And just so that -- I mean I wanted to place on record the fact that the free cash flow generation of the company has been quite robust despite all of these times. I think it's a commendable achievement by the management.

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [101]

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Thank you for appreciating.

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Operator [102]

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

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Aditya Mongia, Kotak Securities (Institutional Equities) - VP [103]

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My questions have been answered.

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Operator [104]

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The next question is from the line of Parikshit Kandpal from HDFC Securities.

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Parikshit D. Kandpal, HDFC Securities Limited, Research Division - Research Analyst [105]

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Earlier, you had highlighted that there are some good prospects in heavy civil, power transmission, water and heavy engineering. Sir, can you quantify at least for these parts that what is the prospect pipeline now?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [106]

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I am not -- don't call them chickens before they hatch, I had not summed it up. But sufficient to say, I'm quite busy going through pricings and risk review meetings and such. There are quite a bit of prospects, which come to you on my level. So there are sufficient (inaudible). I have not added all together to see how much is a prospect, that's putting the cart before the wheel or opening too hungry before you're hungry. So let it come. Let's be positive.

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Parikshit D. Kandpal, HDFC Securities Limited, Research Division - Research Analyst [107]

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Okay. Okay. Sure. Sir, just on the labor issues, I have been talking about with other contractors, the smaller ones and mid-sized. So their sense has been that because of the social distancing in the trains, there not more than 50 people are allowed and even some of the migrant labors which want to come back. So there has to be a policy push on the government side, like how they started the Shramik trains, so there has to be reverse Shramik trains and more in number for the people who want to get back. So on the -- logistically, I mean, how do you see this thing planning out? Have you represented this that the federation [doesn't] bid the government to get these labors back? So what will be the way forward for getting these people back?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [108]

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No. The Shramik trains, let's say, originate outside Mumbai and go to, let's say, Ranchi and they're coming back too. So in these coming back trains, we are loading back the labor who want to come back and we are getting them back in a similar manner, Parikshit. It's not that it is not happening. In some of the labor clusters, we are also arranging buses. And naturally, if a bus can carry 50 people, they now carry only 30 people. But they are [to-back] buses also getting labor back. Some of the major labor contractors, some people who hold 500, 1,000, 2,000 people, they're also playing their part. We may have to reimburse some cost of travel, et cetera, which we'll do from that point of view. As you see now, beyond Shramik trains, some of the regular trains have also started. It's not that trains are not moving. I believe nearly 2,400, 2,600 trains are functioning in the country. Many of them between west and east and south and east. And therefore, there is a movement in labor back. As I said to one of your colleagues, they are adding about 1,500 to 1,600 people a day. The target is to jump it to 3,000, 4,000 by next week or so, and we are on the [job on it].

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Parikshit D. Kandpal, HDFC Securities Limited, Research Division - Research Analyst [109]

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Okay. Sir, on the real estate business, we have been adding projects which have been lacking, and you have been partnering with some of the developers in Mumbai taking up their projects. So how do you see the development business or real estate side now in the current context of COVID-19 from the capital allocation there?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [110]

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See, the real estate business has got, let's say, 2 parts to it. One is the residential part and second is the commercial part. The residential, again, had 2 broad segments in it. The larger ticket sizes, the 4 bedroom and the bigger flats and the studios and the small-sized apartments. Now where we had done these larger-sized block because that was the trend for 3, 4 years back, 5 years back, so we went for it. And those are slightly -- are moving or moving very slowly. Whereas the studio and small-sized apartments, for instance, in the bellwether that we are doing in Bangalore, we even had 25 bookings last week, including everyone's paid and such. So the studio and small-sized apartments are moving very well. Our (inaudible) has gone very well. Our Seawoods has done very well. These are studio or small-sized apartments. The Parel one, which has got one block of some big apartments, that's not moving well. We did a study, inside this year that, that could be made smaller apartments, but the cost of structural modification is very heavy compared to what we can sell before we said, let's wait for it and sell it over time or we give some slight discount and sell it. As such, the residential, I guess, will move faster. So please understand in terms of natural calamities, fear of pandemic, et cetera, people would not invest too much in shares and stocks and bonds and, et cetera, they tend to invest in real estate because consider it a relatively safe investment. So they have looked to a brand like L&T having constructed something to invest there because it's considered to be on time or papers are clean, the property is good to invest structurally and otherwise, and therefore, people will tend to do it. And therefore, we believe the residential will go well. Maybe initially, 1 or 2 month there will be a problem, but it will tend to go well because people have surplus money and they want to invest it. On the commercial side, like you are, I'm also confused. I don't know where this is going to go. We have some commercial developments at the moment. Now whether this work from home is going to come back in a big manner, whether the work from home was a temporary spike and maybe there will finally be some 15%, 20% work from home, et cetera, I don't know. But at the same time, let me tell you some positives on it. The trend in U.S., after the present administration came to power, was that they would want on-premise work. They would tell people to stay in U.S. and work. They've got locals to be employed, so on and so forth. But due to the pandemic there, many other states in the United States and Europe also got closed out. And the people there were working from home. So now we are going back to the clients and saying, listen you'll be paying the x-dollars to do the same work from home, we'll do it at x-minus dollar sitting from work -- from India at home. So why you want these people out here? And second, there is that India, many organizations in the United States, is also looking into cost and optimization and better productivities and improvements. And therefore, I guess, there could be a spike in IT spending from that point of view to bring in overall efficiency. And that would mean more commercial spaces in India and otherwise. And therefore, that's part of the big confusing, we need to wait for the things to settle down from a strategic point of view. But what we look at real estate today is there are very good developments available. And some of the developers are going financially kaput, some of the banks are not able to hold on. Then it is a time for us to get these properties at good prices and see how to make some capital out of it, and that's what we'll try to do.

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Parikshit D. Kandpal, HDFC Securities Limited, Research Division - Research Analyst [111]

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Just lastly on moratorium, have we availed any moratorium of any of the development assets for the EPC business on the working capital side, if you have any comments just...

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [112]

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I couldn't hear you. You've got to be a bit louder and clearer.

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Parikshit D. Kandpal, HDFC Securities Limited, Research Division - Research Analyst [113]

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So I'm talking about moratorium. So have we availed any of the moratorium for our development projects, the old asset Nabha or Hyderabad Metro or any deferments on interest on the working capital side of the term loans?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [114]

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The main company, yes. For the main company, there's no moratorium that we took. For Hyderabad Metro and some of the road concessions, we had applied for moratorium and we had availed what was available to us.

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Parikshit D. Kandpal, HDFC Securities Limited, Research Division - Research Analyst [115]

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And for Nabha, sir?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [116]

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No, Nabha, we have not taken any moratorium.

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Operator [117]

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The next question is from the line of Shalini Vasanta from DSP Mutual Fund.

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Shalini Vasanta, [118]

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I have 2 inter-related quick questions, so I will ask them in one go. I'm -- you said on the group's financial strategy, given that there's [seasonable] leverage in the L&T Group due to the Financial Services business, how do you view this appropriate stand-alone debt levels in L&T Limited? Or would you see 0 debt as an objective? Leaving around the current environment is challenging, working capital always remains an issue in India and you do take some of the credit in the projects. So the first question is regarding the stand-alone debt in L&T Limited, especially in the context of Financial Services business?

Then taking the same question forward. The Financial Services business apart from capital that you alluded to, also needs liquidity now and then because the market can break. You've committed some level of support, how do you see that in terms of support and other covenants saying that you will give this much support or this much capital, maintain shareholding, et cetera?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [119]

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Yes. Let me take this. See, the stand-alone debt in the context of (inaudible) that is they are not connected issues. The -- as I mentioned to someone earlier in this call, the stand-alone debt was the function of the refinancing that we are required to do and the growth money that would be required for our own core businesses, not the ones that is run through listed subsidiaries. The stand-alone debt historically has been very low in L&T. They'll continue to be low. We had raised about 5 years ago, a lot of long-term debt, which is coming up for repayment in the current year. So as we normally do, we have raised money a little ahead of time to repay those. So you can call that as some kind of a timing issue from time to time, but stand-alone debt is for L&T's core requirement, which is largely working CapEx.

When it comes to Financial Services, I think even though there is -- as a parent, or a sponsoring organization, there are credit lines sanctioned by the Board for the Financial Services. So far, they never have had the requirement to dip into those resources to be able to meet their liquidity requirements. Being a listed company, there is adequate visibility on their operations and their disclosures have been fairly transferred into the capital markets. They've been able to raise money on their own, for their requirements. None of the financing that L&T Finance -- the services group, Financial Services group has raised, has got any recourse to L&T. So they are stand-alone debt. And even during the last 6, 7 months, when liquidity was very tight, and we've had so many NBFCs, government issues and credit issues stumbling out of the cupboard. Financial Services, we have been able to manage -- raising money to the extent they require. And at an attractive cost, I do believe that their cost of money is pretty competitive. So to that extent, I think we are closely managing and facilitating and helping the business in a manner of speaking and holding them to deal with economic uncertainty. But I don't think there is any financial drain from the parent to support the liabilities of the Financial Services business.

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Operator [120]

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

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Amish Shah, BofA Merrill Lynch, Research Division - Director [121]

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This is Amish from Bank of America. I only have a couple of clarification questions now. So firstly, in a scenario of potential wage inflation on account of labor shortages, would that also not be a part of your contract?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [122]

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Wage increases, yes, it is, to a large extent, minimum wages are fixed or base wages are fixed, and we can -- if it goes up, we can claim it from the client. But if we are paying some for transport or some incentive cost to get them to a site that would go as a general Cpi inflation claimable, cannot be specifically claimed as what we did from a labor point of view. To a large extent, that's how contracts are defined. In lump sum contracts, we would have taken the normal increase as you see based on Cpi or any other factor. But there, it could become -- we had to put it in some of the costs and payments from the clients that's done during pandemic or done during extra mobilization or something like that.

We may, may not get the full cost that we have on, but to a large extent, it should be got. But we are not talking about -- you see at the end of the day, if you take L&T's contracts, the labor wages are at about 6% to 7% of our total cost. Even if we assume 10% increase on that, it is about 0.6% to 0.5%. And assuming bulk of it can be get reimbursable, you're talking about very negligible cost increase from that point of view. That's one advantage of India, the labor costs are still low.

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Amish Shah, BofA Merrill Lynch, Research Division - Director [123]

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But while your own so -- or let me rephrase it. I think that you use a lot of subcontract labor as well, right? And with the migrants in work, relative shortages that we're talking about, there is possibility that the subcontract labor wage goes up, and that is a decent percentage of your expenses, isn't that right? And could that increase? And if that increases, can that be a substitute, is actually my question?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [124]

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So it's like this and it's a -- all of our laborers are in a way, subcontracted. We don't have any laborers directly on our rolls. We employ the laborers through, what is called as subcontract gang. And there are people who own labor gangs, 100, 200, 500, sometimes even 10, 15 specialized people. So all the contracts are through them. So we give contracts to them either based on minimum wages or through certain productivity measures that we give a base wage, if you do so much productivity, give you more, we give you much more. So there is a cost coming up there. We would recalibrate the productivity increases to tell them to do produce more, and thereby compensate the cost increase, the better productivity on such as the work-contented side. So there's another form of subcontract, like, for example, we give the entire air conditioning to somebody, we give the entire plumbing sanitary work to somebody, we give entire erection work to somebody. In those kind of cases, it's a back-to-back contract. So if we get some money from the client, we give it to them, we don't get money, we don't give them. So that's how contracts work. So it's, to a certain large extent, protected from many points of view.

Of course, they would make monthly claims on us, so we pass on the monthly claims to the client. If we get it, we pass it on. Sometimes, if it's a well-known contractor who's working with us for a very, very long time, we may have to make some adjustments even if we don't get the money. But these are give and takes that happens and somewhere we gain, somewhere we lose it. Overall, it balances out.

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Amish Shah, BofA Merrill Lynch, Research Division - Director [125]

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Okay. And my second question is around L&T Finance. So [Arif] has been mentioning in his comment that if growth comes back, then there may be a possibility of an equity raise. But just to clarify, this debt, and then you did mention about dilution (inaudible). So does that mean that we are talking about L&T, if having to raise equity, L&T Finance will raise on its own, and this is not about L&T increasing when you are increasing its stake into L&T Finance?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [126]

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Every time L&T Finance has raised money since its listing, it has raised on its own. And the decision -- L&T had 100% holding. It had come down to 75%. It had come down to 65%. Last time over, there was a preferential offer where L&T invested in money. So we have had all kinds of situations. We need to judge this in the nature of the investment allocation. If the investment is going to create value for the L&T shareholders, in a larger context, L&T will participate. If the alternate application of money that L&T has, has better return potential, then obviously, the money will be allocated to the more meaningful return asset. So it's a -- it's a contextual thing. We'll have to take a call as and when we come to a situation where capital is required, then we'll take a call.

But the fact is that as a part of services business, Financial Services is an integral part of the services portfolio. And the broader derisking strategy that we have followed at a portfolio level is to balance the projects business, manufacturing business and services business. So that at the portfolio level, we don't have imbalance or risk [due] towards one particular type of activity. So within that overall context, keeping that in the back of our mind, we'll have to take our call from time to time.

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Amish Shah, BofA Merrill Lynch, Research Division - Director [127]

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Sure. And very quickly, my last question is that the project business, as we calculated, actually even currently earns around at 18% ROE, which is actually quite healthy in this environment. While you may not want to confirm that number, but would you say that despite the working capital challenges, execution challenges that we are facing around, this is like a pretty high return business below. If you were to draw an average, will you be an above-average [written] business right now?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [128]

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See, it's a bread and butter of L&T. It's core of L&T. EPC business is core of L&T. So I think over time, we've also -- we're learning and we are mastering the art of execution. So consequently, I think the current levels of return on equity on project business has been hard learned over many, many, many years. And to that extent, I think we would like to stay and improve on that level of capital efficiency for EPC business. Fortunately, most of the EPC business, we do in clients' premises. So we don't have to incur substantial fixed expenditure like setting up a factory and stuff like that. We'll have to manage working capital efficiency. We'll have to contract smartly, procure very capably. If you do all that, I think it is a good business to be in. Risky and the returns that you're talking about is actually the reward that matches the risk that we take.

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Operator [129]

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The next question is from the line of Abhishek Poddar from HDFC Asset Management.

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Abhishek Poddar, [130]

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Part of this question was you touched upon before. So this is regarding the increase in the working capital. And we have seen that the margins have not increased commensurately, and that has led to decline in the ROC in last 2 years. And if you look at the competition, I think the situation for L&T still looks better with competition balance sheet is even in the worst state. So what is your sense that -- do you think that working capital is a stretch would start getting priced in the -- start getting priced in by the competition as well as company, whether returns -- ROICs can return to historical levels?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [131]

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See, working capital, again, is a function of the contractual obligations that we run. Normally, when we sit down and price a bit, we take into account the cash flow trajectory of the project and price amount of money that we need to invest. And that's -- hopefully, becomes a winning price. So if we have a contract that we have won at the price at which we have quoted. So long as there is congruence between the projected cash flow and the actual cash flow, you can say that the working capital has been compensated for by the client or by the project that we are executing. The trouble happens when the projects start getting executed at a time line, which is different than what was originally anticipated. Minute there is a time delay, a lot of things goes wrong in a project, including working capital.

So what we need to be acutely focused on is that if you're able to execute project in time, a lot of these things actually will fall in place and should not create mismatches. But that's wishing for an ideal world, we do go through our own upheavals in trying to execute projects. So the working capital that we are allocating is mostly working capital that has been priced. But because of the way we account, they appear as capital in the current asset scenario. And the margins have been stable despite these movements of working capital. So one other way to look at it is, why do you say that the company has been able to maintain a certain stability in its margin, give and take a certain band which, in my opinion, highly acceptable band of 1%. But the only reason why we've been able to do, most of the time, they've been able to get the pricing of working capital as part of the project.

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Abhishek Poddar, [132]

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Okay. Sir, but if you look at the competition, there are companies with net-debt-to-EBITDA even at 4 or 5x, and part of that problem is stated by working capital. So I understand you also mentioned the budgets and all, but when the companies themselves, when they're quoting the pricing, they would be mindful more about the -- all these issues that is there because these issues are not going away in last 2, 3 years. And we have seen that working capital kind of we are -- we were at 14%, 15%, 5 years back, but those were different times, but we have accepted that 20% to 23% is kind of a normal levels right now. So wouldn't that get priced in, in terms of when you're quoting or would you be constrained by some of their budget? Because essentially what quotation is coming from the entire industry and everybody is a price setter there.

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [133]

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No, that's where I did say that we will obviously price it, then try to endeavor to stick to the same trajectory. And most of the other competition, especially the types that you're referring to, will be so stretched on working capital. The problem is not so much about cost of capital, the problem would be access of capital for them. The availability of bank line to be able to give various guarantee as we get into the project, it still becomes an issue. So access to credit, according to me, is a competitive advantage for L&T, rather than just the competitive pricing of credit between the competition and ourselves.

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Abhishek Poddar, [134]

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Okay. Sir, moving to the second question. You had mentioned earlier that your intent is to monetize the development assets, including Nabha and Hyderabad Metro. You made a comment about allocating more capital to Hyderabad Metro, so how do we see that?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [135]

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No, no. I said capital reallocation in the terms of capital structure correction. Because once the -- see, when the project is getting implemented, it takes in a more traditional capital structure. And once the project gets completed, the construction risk is off the table. And then thereafter, it becomes a project, which is essentially based on revenue risk. So that gives an opportunity for us to resize the debt equity in a project. So if you come across a situation where the project is going to generate less revenue than what is anticipated, the amount of sustainable debt in that project has to come down. So to that extent, there could be an infusion of money to repay the debt of that particular project to make it a sustainable viable debt. On the other hand, if the revenue profile improves in a project, and it can hold to take a little more debt than what it is currently engaged in. Then possibly, the capital unlocking will happen and then the debt equity will get appropriately audited. So the -- what I was trying to say is there are several options, given that we have a portfolio of investments that we have made around our businesses. There's several opportunity for us to productively use the capital so that the overall return at a consolidated level, improves from where it is.

So that's what I meant. I did not mean either to give capital or take capital. Take capital would be to derisk equity exposure. Give capital would be to derisk the unsustainable debt to sustainable debt.

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Abhishek Poddar, [136]

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Okay. So the proceeds of Schneider Electric, which will be coming through. So part of -- you said could go into equity infusion in Hyderabad Metro, is that the right understanding?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [137]

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Yes, it could go to reduce the debt, whether it goes as the equity, it goes as any other form, it's something we need to sit and evaluate. But essentially, if the traffic does not pick up, and suppose, there is extended lockdown and stuff like that, we need to recalculate as to what is the level of sustainable debt. The debt we have committed in that project is based on a certain level of traffic and running without interruption.

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Abhishek Poddar, [138]

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Right. And sir, you mentioned that part of the capital can go in growth of the core business. Is that because of the COVID challenge and it's the short-term thing? Or do you think that your group, EPC growth, you still need more capital?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [139]

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See, growth is life, right? And I think we have not come to a conclusion that we are hitting the ceiling in so far as growth opportunities. And we do think that we should continue to look at a 10% to 15% growth on a year-on-year basis. And when you're looking at 10% to 15% growth, on the delta growth, we also need to provide the capital support. So when I talk about growth requirements, this is what I meant.

Now obviously, there's going to be a timing mismatch because of the pandemic and the disruption that has happened. But we are not measuring the company's requirement in a limited time frame of one quarter or 1 year. We're trying to look at next 3, 5 years, what is it that would take the company to become more stronger, more formidable than what it is. So from that point of view, this capital raise, et cetera, will go to strengthen the growth opportunities for the company.

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Abhishek Poddar, [140]

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Sir, sorry, just the last point. If I look at the...

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Operator [141]

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Excuse me, this is the operator. Mr. Poddar, may we request you to come back in the queue, please?

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Abhishek Poddar, [142]

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This is just a follow-up. It will just take a minute. On the same question. Sir, regarding the -- if I look at the EPC operations and kind of cash flow they generate, if I look at the modeling, the numbers for the next 4, 5 years, I see EPC business is actually throwing up cash flows rather than picking something. So I'm not very clear that where the capital will be going in the growth business in core operations?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [143]

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Can we actually take this offline because this would mean getting into the details of EPC business and where the growth opportunities would come up? And secondly, in a very simplistic way, the model of EPC, which is to be working on customers' cash has changed over time. And going forward, looking at the way various -- our customers are largely government and PSUs, looking at the way the cash flows are arranged in the next couple of years, I would expect that the working capital intensity, not to relent to those levels of either having customers' cash or having very low working capital. So when you want to add another INR 10,000 crores of revenue, you might have to think in terms of INR 2,000 crores of working capital. Just to give you a ballpark guess.

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Operator [144]

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We will be able to take the last 2 questions.

(Operator Instructions)

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

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Puneet J. Gulati, HSBC, Research Division - Analyst [145]

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Yes. Just to clarify, (inaudible) given (inaudible) color (inaudible) the orders. So is it...

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Operator [146]

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Excuse me, this is the operator. Mr. Gulati, your voice is breaking.

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Puneet J. Gulati, HSBC, Research Division - Analyst [147]

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Okay. Can you hear me well?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [148]

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Yes, better now. Yes.

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Puneet J. Gulati, HSBC, Research Division - Analyst [149]

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Okay. Great. Yes, thank you so much for giving a lot of color on the ordering in the completion site. (inaudible) understanding correct that you are not facing any major delays in terms of execution of existing orders and no major cancellations have been reported has well?

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [150]

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Look...

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [151]

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Yes, I confirm there has been no -- there has been delays, of course, because of the 2 months lockdown, but we hope to catch it up. But there's no request from clients or cancellation or go slow or anything like that. There has been some discussion on reallocation of budget, and can we do this a little later and prioritization and such, but as such nothing else there.

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Puneet J. Gulati, HSBC, Research Division - Analyst [152]

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Okay. And does it (inaudible) hold private sector order?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [153]

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Private sector, it's not much at all. It's mainly some Middle East clients who're egressing reallocation of budget and so on and so forth. But hardly anything. No, nothing, no specific requests. In fact, many private sector in India are requesting to speed up and hold back to the original commissioning time in spite of the loss of 2 months.

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Puneet J. Gulati, HSBC, Research Division - Analyst [154]

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Okay. Good. And (inaudible)...

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Operator [155]

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Mr. Gulati, your voice is breaking again.

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Puneet J. Gulati, HSBC, Research Division - Analyst [156]

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(inaudible) prospective orders that you would be looking at this year?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [157]

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I didn't even get your question. Your voice is badly off.

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Puneet J. Gulati, HSBC, Research Division - Analyst [158]

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Sorry, is it better?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [159]

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Yes, much better.

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Puneet J. Gulati, HSBC, Research Division - Analyst [160]

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(inaudible)

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [161]

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No, no, my friend. We can't hear you.

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Puneet J. Gulati, HSBC, Research Division - Analyst [162]

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Okay, sorry. Yes. So I'm saying, can you give some number for the prospect order book?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [163]

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We never do that. As I said, there are prospects. We're quite busy. We have proposals in most of -- many of our businesses, and we look to the future with positivity, but to give any numbers, it's not fair at the moment.

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Operator [164]

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The next question is from the line of Charanjit Singh from DSP Mutual Fund.

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Charanjit Singh, [165]

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Yes. So one thing, which I wanted to check is, like if you look at the ability of the state or central government to order out the average size of the project, do you think that may go down because even in the prospects, I think there was some reduction in the average order sizes and looking at this scenario with capital consumed, maybe they might focus on the smaller projects. How do you see that -- and then L&T's ability to look for those smaller ticket-sized projects?

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [166]

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I think that depends more on the season that you're talking about. See last 2 years, the huge packages of those dedicated fright corridor and this national water schemes and distribution schemes that are going on, and you had good packages. Now much of those work has been done. So unless and until the government comes out with new dedicated freight corridors or the high speed or river interlinking or this Bharat (inaudible) and as such, I don't think there will be scope for very big packages immediately. When you say a very big package, it is greater than INR 5,000 crores or INR 7,000 crores, et cetera. So what I would guess would happen is, unfortunately, we are such a low cost country. Even a huge football stadium, which in Qatar cost INR 4,000 crores. In India, the entire cricket stadium, the world's largest at a reasonable margin that we made has cost only INR 800 crores. That's the kind of costing that we have in this country because of the low prices. We are 3x lower cost than other countries. Just to give you an example, your same L&T was -- in the United States, our turnover would be 3x what it is we reflect in India. But that's the way it is in India. And therefore, we have to live with the fact that our rupee buys a lot more things than what a dollar can do from a pricing point of view.

And therefore, at the moment, I guess, since there are no major new teams that has been announced and what they will do is carry on existing schemes and existing projects, which will be mainly the regular projects, predominantly the National Highways sector, the river -- the certain amount of river interlinking. They are talking about, the power transmission, the water kind of projects and expansion of refineries as such. This would be reasonably big projects, but not those very big value projects.

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Charanjit Singh, [167]

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Okay, sir. And just lastly from my side now. If you look at the MIP and (inaudible) that the government has. So governments wants to sell-out assets across different subsegments or across different companies to raise money. And what we are seeing is that there could be a limited appetite in the near-term from the different -- maybe it's pension funds or wealth funds to invest. So government is, one thing, crowding out as a developer in the market, it will also create problems for the other developers to deleverage their balance sheet. So how do you see this overall selling of the access to different stakeholders in the market going forward? Yes. That's all from my side.

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [168]

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I think sale of assets is taking place in 2 particular manners. One is the divestment program that the government is thinking about. And second is the NCLT process, which has kicked in very earnestly. Unfortunately, the NCLT process, due to this pandemic, et cetera, there's a deferment there and much of the cases that were fast tracked and going very well from a disposable point of view has got deferred by 3 months, 6 months, though of late, some beginnings of disposals are again started. So that is one point.

From a central government point of view, from -- even for them to achieve their budget or even for them to generate certain cash flow, a divestment is a must and part of their overall scheme of things. A few of these assets divestments like BPCL, et cetera, started, but again -- NIC, et cetera, stated. But again, were put in back burner due to the pandemic. I guess, if they have to match their budget to come anyway near matching the revenue requirement of the budget, they need to do some of these things. And that's the process that will continue on value. So good assets will find buyers, and the not-so-good assets, we'll have to see how they take it forward.

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Operator [169]

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Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Arnob Mondal for closing comments.

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Arnob K. Mondal, Larsen & Toubro Limited - VP of Corporate Account & IR [170]

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Thank you, ladies and gentlemen, for a very patient and interactive session. Frankly, it went on considerably longer than what we expected. And with this we'll close this session with a small note that if anybody else has any queries, they are free to contact me or Harish. So with that, good afternoon, and good night. Thank you.

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Sekharipuram Narayanan Subrahmanyan, Larsen & Toubro Limited - CEO, MD & Whole Time Director [171]

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Thank you. Thank you all.

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Ramamurthi Shankar Raman, Larsen & Toubro Limited - CFO & Whole-Time Director [172]

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Thank you. Thank you, thank you.