MC Interview | Saudi Arabia has become a wider play like India for us: L&T CFO

Read edited excerpts of the interview here:

Q. At the start of 2023-24, L&T had given revenue growth guidance at 12-15 percent and order intake growth at 10-12 percent. Now given that your order inflow in FY23 was Rs 2 lakh crore, you have already hit the mid-way mark in H1. During the media call you said that you expect to exceed the guidance; can you put a number to that?

In the first six months of the year, we saw significant order wins in the Middle East, almost two-thirds of the order in the second quarter was from the Middle East; in the six months period it was almost 55-56%. Of this, 90% of the orders from the Middle East are from Saudi Arabia. Typically, these orders are very large and lumpy. So it is difficult to assess how it will be for the rest of the year. These big and lumpy orders are outliers, but it is an important win for us, because it endorses the capability of the company and enables the company to operate at a much higher league than the opportunities that India provides us.

In the six-month period, the domestic orders have grown by 15% in contrast to the international orders which have grown by over two and a half times. Our sense is that the domestic orders will start moving forward, because looking at the prospects of about Rs 8.5 lakh crore that we have almost Rs 5 lakh crore in the area of infrastructure alone. It remains to be seen as to what is the intensity, frequency with which these opportunities are put out as bids, tendered out and selected and awarded. I think to expect such lumpy orders in Q3 and Q4 and hence take the order inflow guidance for the year into a stratospheric level becomes a bit of a challenge. All that we are able to assess now is that looking at the way we are positioned number-wise at the end of H1, it is very likely that we will outperform the 10 to 12% order inflow guidance that we have given for the year quite handsomely. The guidance is a kind of a goalpost that we set for ourselves for the year as a whole. I don't think it's a good idea for us to keep shifting that goalpost, because I think we all as a company get confused as to what it is that we are chasing. So the goalpost remains the same. So both in terms of order inflow and revenue growth, we are expected to outperform the guidance quite well.

Q. In Q2FY24, L&T exceeded street estimates on most financial parameters. The only dampener was the earnings before interest, taxes, depreciation, and amortization (EBITDA) margin which declined to 11% from 11.4% a year ago. You have mentioned earlier that the decline is due to the pre-COVID legacy orders which are being executed at post-COVID raw material prices. For the rest of the year, where are the margins headed and how much more of these legacy orders are left in the order book?

It will progressively improve in the third quarter and the fourth quarter and in FY24-25 you will see us return to more normalized levels of margin. Even though we don’t look at the quarter-on-quarter basis, the infrastructure segment reported a 5.1% margin in Q1 which improved to 5.4% in Q2. I expect this to keep migrating upwards to its potential of 7% over time. The overall margins of our manufacturing and services segment is at 7.4% today and was at the same levels as Q1 margin. The guidance was that it will move up to 9% from the 8.6% we reported last year. The effort between Q3 and Q4 is to get this 7.4% up as much as we can. Our assessment tells us looking at the way projects are positioned for execution, that we should be landing up at the end of the year anywhere between the margins we reported last year and the goal that we have set for ourselves as 9%; it could be anywhere between 8.5 to 9%. And what the market is reading as rerating downwards of the guidance is the them looking at a target of 9%. But I just want to elaborate and clarify that we never said 9%, we always said that we would like to move up from 8.6 to 9%, which is working our way up for about 40 basis points. We're still saying the same thing, except we're saying that it could be anywhere between 8.5 and 9% and not at the higher end of the band. We will wait and watch global interferences like wars, but our effort would be to keep pushing towards our goal.

Q. We can’t even fathom the human aspect of the Israel-Hamas war. But from a business point of view, with almost 80% of your international orders coming from Saudi Arabia, how are you viewing it?

Saudi has been a good market for us, because we are benefiting from their Vision 2030. The kingdom today wants to reposition Saudi from just being an oil and gas exporter to a much larger economic play. They're building not only the energy part of the business, but also several other parts of the business and we are benefiting from all of those. We are a large participant in their energy transition, in solar energy and we are participating in their projects for recreating cities and building new ones. Saudi has become a wider play like India is for us. We participate in several areas. Fortunately for us, in the strife that Israel is currently caught in, the Saudi's participation at the ground level is very low key. Geopolitically, I wouldn't know as to how the palace and the kingdom is thinking about this, but the things on the ground seem to suggest that it is fairly secure in terms of its project execution time schedules. The war is already two weeks old, and we have not seen any interruption. We do believe Saudi's slant towards participation will be low key, because they have to strike between the political stance and the economic development, which seems to be tilting in favor of economic development now.

Q. You mentioned in the media call after the result on October 31 that the information technology and technology services (IT&TS) business is facing headwinds, much like your competitors. How is the environment looking going ahead? Are you going slow on hiring? 

The IT clients and engineering technology clients are very different species. The technology clients are actually proceeding with their program, which improves the functionality of their end products. To stay ahead in technology for their own competitiveness becomes a compelling reason for them to continue to outsource engineering technology work. L&T Technology Services, which is more into embedded engineering, is in a better place comparatively speaking as compared to commercial IT for the next 6-12 months. Commercial IT has a fair bit of discretionary spend. A lot of money was spent in migrating the data from on-premises servers to cloud etc. We did benefit from that move and bagged a fair bit of orders as businesses, particularly post-pandemic, started resorting more and more to internet-based transactions. That phase will slow down a bit now because people would possibly like to reassess as to how that spent that they have done on that area is going to pay out for them. But insofar as regulatory compliances, financial services, and essential services go, we will continue to see traction. Except that given the overall slowdown in the IT spend, the competitive intensity has increased.

The clients also obviously will take advantage of this situation and in putting out projects more and more based on outcome. In the sense that it is not going to be hiring for time and material spend, but it is also going to be part of the compensation that will come out of the outcome we achieve. If there is a productivity improvement IT project that we are doing, we have to establish productivity and share the upside with the customer. Now this is a trend globally and all IT companies will have to reposition their business models and we are doing that as well. So in a way, it is an investment-led IT growth. This transition between just mass hiring for time and material to outcome-based is an inflection point in the industry and I think that's what the industry is going through. We have grown by 7% for the quarter and 10% on year. But this is not the same as 15% and 20% growth levels that we saw 2-3 quarters before. We think it will settle down, because we are inextricably connected to technology in the way we work and conduct our business. The discretionary part will become a compulsory part of business existence. We have already scaled up and are almost the fifth in that list of IT companies serving out of India. We will continue to work on our competency.

When we talk about staffing, I think it is just not the question of how much compensation we need to pay to people, we need to have people of the right skill set as well as transiting towards AI and all the related technological developments. We need to re-skill our people. People who wrote the normal COBOL code will not be useful today, because of the evolution that has happened. So the investment that we need to make in talent, which will enable the industry to help our clients move to the next 5 -10 years is something that the industry is talking about. We are also talking about it and augmenting the resources of the right kind. We also have to balance between the pyramid, because we need to have a good amount of lower band of people who will cost less, but who will do the grunt work within this space and then we will have to build business leadership and technology leadership on top of that.

Q. In your developmental projects business, you are working on improving the performance of Nabha Power plant and Hyderabad metro projects with the intent of finally divesting. How far are we from going forward with the divestment?

The good news is that on a quarter-on-quarter basis, we are improving the profile and economic prospects of the project. The effort would be to receive the full tranche of Rs 3,000 crores soft loan from the Government of Telangana for Hyderabad Metro; it’s a no interest long-duration loan being used to reduce the commercial borrowings taken for the project. It was also important for us to actually start selling land parcels attached to the metro project and we made a successful start in the quarter that just ended by selling almost 17 acres. It did take a long time to get the consent of the government and authorities to be able to do that and now that we have done with one parcel, we should continue to look at other alternate parcels and make sure that the land value is unlocked. The value that we will realize by selling this land, apart from it generating some profits, will also help us unlock value which can be used to repay the debt. Ridership which has been improving very steadily month-on-month. Today, on every working day more than 5 lakh people travel and one year before this number was 3.5-3.8 lakh; there has been a tremendous improvement on that and we hope that as more and more organizations ask people to report back to work, this will increase. And thirdly, the Telangana Government has come up with the proposal for expanding the railroad network. We are not going to be a sponsor of that project, but we will get an opportunity to build it if we are competitive. That will help to complete the feeder networks for this project as well and this project will benefit from that larger network development. Consequently, sale of land, using the proceeds to repay debt, increasing ridership, getting the soft loan and repaying debt. All of that will enable the project profile to significantly improve from where it is today. In two years, possibly two and a half years from now, we should be able to make a proposition for this project as an attractive investment to funds, maybe sovereign wealth funds or private equity funds. Or some other REIT investors. We will have to figure out who at that point in time would be the interested suitors. But we're definitely moving towards that. Once we make the project healthy, we are confident that we should be able to find attractive investors. We are still operating at the first tariff that was fixed. The tariff fixation committee has recommended that the project is due for a revision. So maybe we will identify the right time window for us to announce the revision as well. So that'll also add to the viability of the project significantly.

Q. Last few weeks, Mumbai has seen poor air quality, which is in part being attributed to the high level of construction work going on in the city. L&T is involved with some of the biggest projects in the city- be it the coastal road project or metro work. What is your assessment of the situation, how much of the pollution is actually coming from infrastructure? What measures are you taking to ensure that at least you are not contributing to the pollution?

We have been working with the government for several months now on a pro-bono basis to improve the pollution level and minimize the disruption that construction activity causes to the city of Mumbai, because so much of our contracts are under execution. We do believe that we are an important stakeholder in this. As a company, even before the smog became an issue of debate and inviting attention of central government and local authorities, we have been in our sites practicing several processes to make it easy for our own workmen working there. We have been making need-based efforts on our sites; we use water sprinklers quite regularly and use wet cloths to absorb the dust particles. We use barricades; you will find the quality difference between the barricades that we use for our sites versus what somebody else uses. All of this costs extra money, and the contract does not provide for it. It's a question of whether we believe that we have to provide the right environment for our workers to do and the costs that we incur will get repaid by the improved productivity and lesser fatality and better safety. That's the belief with which we work.

Many of the things that the government has come out with as an announcement are nothing but practices that L&T is following. And we have also shared this with the government saying that these are the things that should be made mandatory for all the contractors who work in the city of Mumbai. We do believe half of the problem lies with the construction and half of it lies with the pollution caused by emissions of other kind. I mean look at the traffic congestion and look at the state of roads. The state of roads adds to more time, more hours on the road and more hours on the road means more fuel being burnt and pollution being created. Construction seems to be an easy target, because it's most visible. But equal measure the vehicle pollution is also something that we need to bother about. Third, I think, in the quest for real estate development, the authorities that approve all this are in some sense changing the tree line of Mumbai, the greenery is shifting. For example, a company like us has planted almost 2 million saplings in the half-year ended 30th September alone, because we are conscious of the fact that we are destroying so much of greenery to build all the infrastructure. But this is not a uniform practice in the industry.

And also the authorities that when they give sanctions for projects, especially the residential, commercial real estate, etc. The amount of trees that get felled and not adequately replaced is something that the authorities will also have to think about. There is something like capacity for every city. Mumbai seems to be like a sponge, it absorbs more and more and more. It has been going on for the last 50 years. Now there comes a time where the city has to expand to other corners for which jobs have to move there. The larger issue is that city planners will have to take into account that Mumbai cannot be the panacea of every hungry stomach. We have to figure out a way to deal with this better. But I can only assure you that what the government is putting out as standard operating practices are what we have shared with the government as our practices.