Infrastructure giant Larsen & Toubro expects its operating margins from the infrastructure segment to rise from current levels in the last quarter of the current financial year 2023-24, the company's chief financial officer R Shankar Raman said.
On July 25, L&T reported its financial result for the first quarter of 2023-24 where it exceeded analysts' expectations on the top line and bottom line. However, the company missed its forecast for margin which declined year-on-year once again.
Speaking in a post-earning media conference call, Raman said L&T's operating margins from the infra segment are expected to improve after December as the company will by then begin execution of higher-margin infrastructure projects.
"We had seen an aggressive pricing environment in the infrastructure segment in the post-COVID-19, post-Russia-Ukraine (conflict) period in 2022-23. During that period, L&T won infrastructure projects at very aggressive prices, which has impacted our margins," Raman said.
He added that currently around 35-40 percent of L&T's order book of Rs 3,01,159 crore from the infrastructure projects segment is made up of orders that were won at aggressive prices.
L&T's infrastructure projects segment has seen a sequential fall in operating margins for the last five quarters.
In the quarter ended June 30, 2023, the company reported a 140 basis point fall in its operating margin from the segment to 5.1 percent, when compared to 6.5 percent in the same period a year ago.
Raman said that the contraction of operating margin from the segment is likely to ease over the next few quarters as all older projects won at aggressive prices will be executed.
"Orders L&T has won in the last quarter of 2022-23 and in 2023-24 so far have been at a better price which will help bounce back operating margins from December," Raman said.
Order Inflow
Despite the growth in operating margin expected after December 2023, Raman said that he expects L&T's order inflow to taper down in the second half of 2023-24 due to the upcoming general election in India between April and May 2024.
"We will have to be wary of a slowdown in order inflow due to the upcoming general election and plans of the subsequent government that may take over," Raman said.
He added that order inflow in the first half of 2023-24 is likely to be higher than the second half of the financial year, with significant order inflow expected in the transportation, water, and public infrastructure space.
Raman also said that L&T is likely to meet the higher end of its revenue and order inflow guidance for 2023-24 and may consider revising its guidance for both revenue and operating margin after the October-December 2023 quarter.
At the start of 2023-24, L&T's management had said that they expect the engineering major's revenue to grow at 12-15 percent and order intake growth at 10-12 percent in the current financial year.
He added that L&T is seeing strong signs of high-order execution in 2024-25, buoyed by falling energy prices and headline inflation in global economies.
"Prospect pipeline is reflective of capex tailwinds across India and West Asian countries," Raman said.
The reopening of China's economy and expectations that major oil-producing nations will continue to invest in oil and gas, industrialisation, and energy transition initiatives will augur well for the company’s projects business.
Raman also said that going forward, L&T's revenue share from international orders is likely to increase.
Buyback
Speaking about the proposed buyback of shares worth Rs 10,000 crore, as approved by the company's board on July 25, Raman said that he does not expect the Securities and Exchange Board of India (SEBI) to deny L&T permission to go ahead with its buyback this time.
"We don't need to take permission from SEBI for our proposed buyback as long as all buyback guidelines are met. We just have to inform them of the buyback plan after getting shareholders' approval," Raman said.
He added that the price at which L&T will complete its buyback has not been finalised yet and the tentative price of Rs 3,000 per share is the maximum price being considered by L&T at the moment.
Raman also said that once the shareholder's approval for the buyback is received, L&T will decide on a date for the buyback and final price.
He also said that on a consolidated level, L&T's cash-on-books stood at around Rs 40,000-45,000 crore as on June 30, 2023.
On a standalone basis, L&T's cash-on-books stood at around Rs 27,000 crore as on June 30, 2023.
According to the company's balance sheet shared on the bourses, its cash-on-books stood at Rs 58,093 crore as on March 31, 2023.
Raman also told reporters that the buyback is part of L&T's plan to improve RoE (Return on Equity) as part of the group's 'Lakshya 2026' plan.
He also said that L&T's board has approved a special dividend of Rs 6 as part of the celebration to honour executive Chairman AM Naik who will be stepping down on September 30, 2023.
Divestment
Raman added that there has not been any development in the divestment plans of L&T for now.
"Will have to be patient to complete the divestment of the Hyderabad Metro Project," Raman said.
He added that L&T will continue to reduce the debt of the Hyderabad Metro Project and is continuously working to improve the operations of the metro service.
Raman also said that L&T has received around Rs 500 crore from the Telangana state government as part of the grant for the Hyderabad metro project.
He added that the daily ridership of Hyderabad Metro has risen to a peak of around 5 lakh daily passengers in the quarter ended June 2023.
"For the first time ever, Hyderabad Metro reported a profit on operating level in Q1FY2024," Raman said.
He added that L&T hopes to complete the divestment of Nabha Power in 2023-24.
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