Larsen & Toubro (L&T) has seen a good 23% year-on-year jump in order inflows in Q2FY23 and execution has gathered pace. The company hopes to make meaningful progress on the divestment of the roads portfolio and in reorganising the capital structure of the Hyderabad metro. R Shankar Raman, whole-time director and CFO, L&T, tells Shobhana Subramanian in an interview that L&T will definitely step up dividends from the current level of 40% of the profits. Also, it will revisit a buyback once the business environment becomes more predictable. Edited excerpts:
Order inflows and revenues have been strong in Q2FY23…
We had guided for a growth of 12-15% for the year for both. We should end the year closer to the top end of the band, given the strong pipeline. Also, the softening commodity prices should help the margins.
Larsen & Toubro had contemplated a buyback in 2018…
We are targeting a return on equity (RoE) of 18% from 12% currently and hope to reach 16-17% by FY26. To ensure scale of operations, our revenues must grow at a sustained 12-15% and they must be profitable. Moreover, we also need to continue to be disciplined about the use of working capital which is now down to 20% of revenues. Once the divestments are complete, we will see cash inflows and our capex would be modest at Rs 2,500-3,000 crore annually. That, together with a more stable and predictable environment, would allow us to go to the board with a buyback proposal.
How do you read domestic private sector capex spends?
The share of private sector orders, both local and overseas in H1, was 37%, which we have not been seen in the past 8-9 quarters. As far as local orders are concerned, the share is around 15-17%. Much of the capex is for brownfield rather than greenfield expansion, but balance sheets are in a good shape and the momentum is building. Apart from steel, cement, paints and autos, many data centres and IT campuses are coming up as are hospitals.
So, the PSUs still account for the bigger share?
Of the domestic order book of Rs 2.68 trillion, a little over 40% is from PSUs, 30% is from the states, with the Centre (10%) and private sector accounting for an 18% share. Nearly 27% of the total order book is funded by multilateral agencies.
Is the demand from the Middle East (West Asia) promising?
Yes, solar projects are coming up. The energy crisis has had an upside in the investment momentum and several sectors such as minerals and metals are doing well. There is an infra-build-out in Saudi Arabia which is adding to demand. The robust mid-east demand could be a compensating factor in the event the states don’t spend on capex as expected.
Are the revised procurement guidelines for central projects challenging?
Not really. They are putting more emphasis on domestic procurement, which is a good thing. Also, they are willing to proceed with a single bid — if it is eligible, which is good for us. The inclusion of quality-based cost competencies as a factor also helps us since price alone will not be the criterion. The government has said it will be more vendor-friendly and disburse funds more easily. However, the bureaucracy must implement all this, that’s where the challenge lies.
Could you update us on the Hyderabad metro?
The ridership has gone up to 450,000 passengers per day from about half those levels. We’re hoping the IT crowd returns to office and the ridership goes up to 6-7 passengers a day in about two years. We have received permission for long-term loan of Rs 3,000 crore and also to monetise land parcels. This will help us set right the capital structure which is not in line with the ridership. We intend to bring down the debt to Rs 8,000 crore.
When would you be able to divest the roads portfolio?
We are hoping to sign an enabling agreement to divest the roads portfolio in the next couple of quarters and are awaiting regulatory approvals. So, it is in the discussion and documentation phase and we hope to ink the agreement by December.
Are you planning any diversifications?
We do not intend to get into the PPP space. The only new area we are exploring is in green energy and that, too, just in the electrolysers segment. We are in discussions for technology.