Larsen & Toubro Limited (LT.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Larsen & Toubro Limited Q4 and FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. P. Ramakrishnan, Head Investor Relations, Larsen & Toubro Limited. Thank you, and over to you, sir.

Thank you, Margaret. Good morning, ladies and gentlemen. A very warm welcome to all of you to this Q4 and FY '21 earnings call of Larsen & Toubro Limited. We have with us on the call today, our Chief Executive Officer and Managing Director, Mr. S. N. Subrahmanyan; and our Whole-Time Director and Chief Financial Officer, Mr. Shankar Raman. The analyst presentation was uploaded on our website yesterday at 7:00 p.m. Hope all of you would have had a chance to go through the same. Instead of going through the entire presentation, I will give you a brief overview of the performance in the first 15 minutes or so, post which we will take Q&A. Before I begin the overview, a brief disclaimer. The presentation, which we have uploaded on our website yesterday and the discussions we will have on the call today contains or may contain certain forward-looking statements concerning L&T's business prospects and profitability, which are subject to several risks and uncertainties, and actual results could materially differ from those in such forward-looking statements or discussions. FY '21 was a year that witnessed unprecedented change. It can be best described as the year of test for all the constituents of the Indian economic system, be it households, corporate and the government. The financial year commenced with a lockdown and the country had to face a deep contraction in economic output. However thanks to the timely intervention from both the government and the Reserve Bank of India, the country recovered progressively with each passing quarter. The Q1 economic contraction was the most, followed by a shallow contraction in Q2 and Q3 recorded growth. Q4 GDP numbers are yet to be published, but we do believe India would have degrown between 7% to 8% in real GDP terms in FY '21. Now coming to company performance. We have had multiple surprises in a COVID-impacted year. Important is most of the parameters of our core business have come back to normalcy much faster than what we expected. Our order inflows for the year at INR 1.75 trillion was achieved on the back of strong domestic wins in Infrastructure and Hydrocarbon segments. We picked up very large and prestigious orders, notably the Mumbai-Ahmedabad high-speed rail, the bridge across the Brahmaputra in Assam and the EPCC package for the Rajasthan refinery. The order book at INR 3.27 trillion as of March 31, 2021 is at near record levels. The healthy and diversified order book provides us revenue visibility and mitigate cyclicality. Secondly, a predominance of public exposure in the order book around 83% reduces credit risk in these challenging times. Our revenues picked up momentum with every passing quarter, despite experiencing productivity challenges due to the ongoing pandemic. We ended the year with revenues of INR 1.36 trillion, Just for reference, our Q1 revenues were INR 210 billion, Q2 at INR 310 billion, Q3 at INR 356 billion and we ended Q4 with revenues of INR 481 billion. As you can see, there is a strong sequential pickup with every passing quarter of FY '21. The Q4 FY '21 growth on a Y-on-Y basis was 9% higher, evidencing return to pre-COVID levels of activity. Our overall EBITDA margins for FY '21 improved from 11.2% in FY '20 to 11.5% in FY '21, despite the headwinds emerging from the overhead under-recoveries in a COVID year. We have been most surprised on the customer collections front in FY '21. Thanks to the government for having adequately prepared itself in a COVID year through a large borrowing program, we witnessed strong cash flows in FY '21. Our group level collections in FY '21 were INR 1.26 trillion, whereas at a parent level in FY '21, we collected INR 760 billion out of which Q4 collections was INR 270 billion. We ensured that the collection from customers also got passed on to our supply chain in a similar manner. In addition to making normal payments, the government in a difficult year also supported contractors by releasing claims, retention payments as well as relaxing bank guarantee requirements. Consequently, our net working capital improved from 23.7% as at March '20 to 22.3% as at March '21. The robust operational cash flows in a difficult year enabled us to repay a part of our borrowings as well. Both our gross and net debt levels have improved at the parent level. We began the year with gross and debt levels of 0.49 and 0.31, respectively, And we have ended the year with gross and net debt levels of 0.39 and 0.04, respectively. Finally, as you may be aware, the E&A, the Electrical & Automation divestment was also concluded during this year. Now a quick summary of Q4 FY '21 performance. Our order inflows for Q4 at INR 507 billion, registered a degrowth of 12% on Y-on-Y basis, mainly due to some tender deferments and delay in award closures. As said before, our Q4 revenue at INR 481 billion registered a growth of 9% on a Y-on-Y basis. Our recurring PAT for Q4 at INR 34 billion registered a growth of 12% Y-on-Y basis. On a sequential basis, though both revenues and overall PAT are up 35% and 33%, respectively, again, largely due to normalization on the easing of COVID restrictions prior to the onset of the current COVID second wave. Our return on net worth for FY '21 is at 16.2% vis-a-vis 14.8% last year. The return on net work for FY '21 includes the gain on the divestment of the E&A business. Some comments on order inflows and order book before we proceed ahead. Our Q4 orders at INR 507 billion were largely led by Infrastructure, Hydrocarbon and Heavy Engineering. Power generation continues to remain subdued. Within Infrastructure, we did bag a couple of Middle East orders in Q4. Significant orders during the quarter were received across most segments like factories, hydel and tunnel, metros, special bridges, nuclear power, rural water, renewables, hydrocarbon offshore and minerals and metals. There is a visible focus on CapEx in the union budget which should fortify as the year progresses. Our projects business prospect pipeline for FY '22 has improved by 8.5% as compared to the level witnessed at the start of FY '21. We see total prospects of INR 9.6 trillion for FY '22 comprising of domestic projects of INR 6.56 trillion and INR 2.5 trillion of international projects -- prospects. For FY '21, the prospect pipeline was INR 8.35 trillion. Infrastructure has the major share of these order prospects at almost 77% followed by hydrocarbons at 16%. Our order book at INR 3.27 trillion as at March 31, 2021 comprises of around 79% domestic orders and 21% international orders. Around INR 1 trillion of the current total order book of INR 3.27 trillion is funded by multilateral agencies. This represents around 31% of the total order book. The split between domestic and international order book is INR 2.58 trillion and INR 688 billion, respectively. Further, the split of the domestic order book of INR 2.58 trillion is as follows: central government takes a share of 9%; state government, 31%; public sector corporations, 44%; and private 16%. The overall group performance, financial parameters are covered in the presentation, along with explanations for major variations. I hope you all had a chance to go through the same. The only point I want to mention here that the profit from discontinued cooperations -- operations net of tax in Q4 reflects the final post-closing adjustments envisage that are pending discussions and closure. Now I come to the segment performance before I move to the final part on outlook. Infrastructure. The ordering momentum continued in this segment in Q4 as well. During the quarter, we received the order for the largest solar PV plant in Saudi Arabia. Full year order inflows in this segment are INR 1.2 trillion, registering a growth of 4% despite the muted ordering activity in the first half of the year. Our bottoms-up prospect pipeline in Infra is INR 6.97 trillion for FY '22 vis-a-vis INR 6.35 trillion in FY '21. The share of international prospects to this total is higher around 24%. The revenues in Q4 at INR 262 billion, up 5% on a Y-on-Y basis. The strict safety protocols amidst continuing pandemic moderates the progress. Full year revenues in this segment is impacted due to the slow progress in H1 due to lockdown. Q4 and FY margins improved due to the tapering of certain stressed jobs in the Transportation Infrastructure subsegment, reduced expected credit loss provisions due to collections of overdue sums and claims settlements in a few projects. It is important to note here that our full year margins have improved despite under-recoveries in a COVID year. I come to Power segment. The award activity deferments we were witnessed in the thermal power space during the current year. However, for us, this segment is largely unimpacted because of a large opening order book and a couple of quarters of award deferments will not impact the fortunes of the segment in the near term. Having said that, we did receive an FGD order, the Flue Gas Desulfurization order in Q4. The robust revenue growth in Q4 and 12 months is a function of a good opening order book. The margins for Q4 and FY '21 remain subdued as major part of the order book is yet to cross the margin recognition threshold. The previous year Q4 and FY margins were higher due to a favorable customer claim settlement. I come to Heavy Engineering segment. The robust order wins in the nuclear power business, around INR 1,200 crore of fleet orders from NPCIL drives the Q4 FY '21 order inflow. The full year order inflow also registers a smart recovery over the previous year. The ratio of domestic and international in the order inflow for FY '21 is 65-35. The pickup in execution across multiple jobs leads to a strong revenue recovery in Q4. The robust Q4 margins is reflective of job mix and claims. The variation in the full year margins explained by a settlement reached with an international client pertaining to a warranty claim. I come to Defense segment. The ordering momentum in Defense Engineering segment remains subdued in Q4. Multiple small order values continue to replenish the existing order book. The recent policy pronouncements are encouraging for the domestic industry, and we remain excited about the future outlook. Implementation, however, may happen over the course of time. The better progress in multiple jobs drive healthy revenue growth in Q4. The cost savings drive margin buoyancy again in the Q4 quarter. I come to Hydrocarbon segment. The healthy domestic wins in Q4 replenishes the order book. Further improved activity levels at our fabrication yards and peaking out revenues in the onshore vertical aided revenue recovery in Q4. The margin buoyancy in Q4 is the result of cost savings and job mix. The variation in full year margins is explained by under-recoveries in a COVID year. Our bottoms-up prospect pipeline in hydrocarbon for FY '22 is INR 1.4 trillion, comprising of domestic prospects of INR 600 billion and around INR 800 billion of international prospects. With Brent prices stabilizing above $60 per barrel, we expect the return of international awards in FY '22. Secondly, we are also witnessing a lot of bunching up of prospects now due to the muted ordering in the hydrocarbon sector over the last 4 to 6 quarters. I come to Development Projects segment. This segment includes our Power Development business that mainly comprises thermal and hydro power plant and the Hyderabad Metro and the investment in the L&T Infrastructure Development projects JV. As you are aware, the roads and transmission line concessions are housed in L&T IDPL and consolidated only at the PAT level under the equity method. The strong Q4 revenues in this segment is largely contributed by the Power Development business as strong electricity demand drives revenue growth in Nabha. The Hyderabad Metro ridership is reflective of the continuing pandemic. The segment margin in Q4 is impacted by OpEx under recovery in Metro. Coming to Hyderabad Metro. The Hyderabad Metro, we believe, is a remunerative long-term transition. However, it has been severely impacted due to COVID. Now it is important that the capital structure of the L&T Hyderabad Metro rail should be such that the asset can sustain itself. From loan, to refinancing, to getting support from the state government for soft loans and claims for past overruns, to explore monetizing TOD rights, to assistance from L&T, all such options are being explored. The metro has about 60 years of remaining concession left. And since the construction risks are off the table, we will now have to deal only with operational risks. All the options will be explored to improve traffic through network effects and last mile connectivity. We will work closely with the Fare Fixation Committee to set up annual fare escalations based on cost increases. We have around 18 million square feet of transit-oriented development, which will be monetized over time. We will keep you posted on the developments. Now I come to the Information Technology and Technology Services segment. For us, this segment comprises of the 3 listed companies: L&T Infotech; L&T Technology Services; and Mindtree. All the 3 companies have declared the results, and the same are available in the public domains. Without getting into too much of details, let me mention that this segment has largely been unimpacted due to COVID, and it continues to grow. You would have noticed that the margin improvements in this segment has been driven by a combination of improved utilization, a better onshore/offshore mix and operational efficiencies. I come to Financial Services segment. The Q4 evolved around strong pickup on rural disbursements, robust collections, improved net income margins and maintenance of adequate liquidity on the balance sheet. Post the rights issue, the business has sufficient growth capital. The loan book has decreased to INR 94,013 crore as on March '21 compared to INR 98,384 crore as on March '20. The drop is largely due to focus on collections, portfolio sell down as well as the reduction in the defocus book. I come to the last segment which is others, which comprises of Realty, Construction & Mining Equipment, rubber processing machinery, industrial walls and smart world & communications. The strong Q4 revenue growth led by smart world & communications, Construction & Mining Equipment, rubber processing machinery and industrial walls. The Q4 margins in this segment is largely stable as compared to Q4 of the previous year. Before I move to environment and outlook, I would like to spend a couple of minutes on our ESG journey. I'm happy to report that L&T has been upgraded to BB by MSCI in March '21. Secondly, we are having active discussions with leading ESG rating agencies to explain our progress on the various ESG initiatives being carried out by the company. Our group is 8 decades old, and we have been at the forefront on many of the sustainability initiatives long before it was mandated by law. In other words, we have tried to implement many of the ESG initiatives, both in letter and spirit. Further, through disclaimers in our integrated report, we have also clarified our position on the involvement in controversial weapons in the Defense Engineering segment. For the benefit of everyone on this call, I state below. The business -- the Defense Engineering business does not manufacture any explosives nor ammunitions of any kind, including cluster ammunitions or anti-personnel landmines or nuclear weapons or components for such ammunitions. The business also does not customize any delivery systems for such ammunitions. Finally, in our analyst presentation that has been loaded, we have included a couple of slides on energy conservation and renewable energy, occupational health and safety, our green portfolio as well as the group's initiatives towards employees, contract workers and society in times of the COVID pandemic. The data provided in these ESG slides are subject to audit. Our integrated report FY '21 will be ready in a couple of months. Lastly, we are working to create a long-term ESG framework that would get integrated with the 5-year strategic business plan FY '22 to FY '26. This should get ready in a couple of months, and we will articulate on the sale at an appropriate time. Coming to the last part on environment and outlook. During the year FY '21, our country has demonstrated tremendous economic resilience despite the strict lockdowns, reverse labor migrations, supply chain distributions resulting into GDP contraction in the initial part of the year, followed by a progressive pickup in the second half. Further, the growth momentum has been given a fillip with the Finance Minister announcing an investment-focused budget. Just when we thought the worst is behind us, the country is impacted at onset of a more ferocious second wave of COVID, which has unfortunately impacted many states today. Having said that, I wish to highlight here a couple of positives and how the current wave may not disproportionately impact the economic activity as happened -- as it was witnessed in the previous wave. Firstly, movements are permitted this time around, though in a restricted manner as against a full lockdown. Secondly, vaccination programs have commenced in full swing and hopefully a good part of the population should get covered over time. The RBI with an accommodative monetary policy and the government with its enlarged fiscal spend continue to provide the base level support to the economy. For the reasons just mentioned, we believe that the recovery is delayed, but not derailed. As per the various reports, the infection should start subsiding sometime this quarter. And we could witness domestic recovery from Q2 onwards. Elsewhere, most parts of the global economy are also gradually recovering from the impact of the COVID-19 pandemic. But it continues to remain uneven across countries with economic activities in many countries still below pre-COVID-19 levels. With oil back above $60 per barrel, we should see a pickup in GCC CapEx as well as improved prospects in Africa and Southeast Asia. This view is confirmed by our bottoms-up aggregation of international order prospects for FY '22. Despite the ongoing challenges, we expect up to a low to mid-teens growth in order inflows and revenues while maintaining stable core business margins for FY '22. We will endeavor to maintain the net working capital around the same level as of March '21. In the backdrop of the COVID-19 pandemic and the resultant challenging economic environment, the company, while upholding the primary victim of maintaining the health and safety of its personnel, will continue to aggressively pursue opportunities for growth, both in domestic and international markets. The focus would be on large project wins, efficient execution of its large order book, productive utilization of its monetary resources, all targeted to ensure a sustainable business model and thereby improve shareholder return. Ladies and gentlemen, thank you for your patient hearing. We will now move on to Q&A. As I said earlier, we have with us today our CEO and MD, Mr. S. N. Subrahmanyan; and Whole-Time Director and CFO, Mr. R. Shankar Raman on the call today, who will be taking the questions. To make the best use of the available time I would request all participants to focus on questions related to business strategy and other relevant macro matters. The IR team, led by me and my colleague, Harish Barai, would be happy to take the detailed bookkeeping questions off-line. Over to Margaret.

[Operator Instructions] The first question is from the line of Mohit Kumar from DAM Capital.

Congratulations on a good quarter in a very, very challenging environment. So my first question is on the macro has become uncertain, especially in domestic segment. International was barely anything significant in FY '21. What is the expectation for the order finalization, especially in domestic and Middle East? And can you please give some granular detailing segment-wise and geography-wise? That's the first question.

Shankar Raman here. See, in terms of the prospects, Infrastructure prospects continue to be the largest piece in our overall pipeline. We did mention during the course of the commentary by my colleague, P. Ramakrishnan, that we assess the prospect pipeline for FY '22 to be around 8% to 10% higher than what we saw last year this time. But of course, last year this time was a very difficult and different scenario. So it's not really comparable. So we'll focus on what we are able to see ahead. A lot of our belief stems from the fact that the government is focused on economic recovery, through investments in key sectors. Fortunately, the sectors that they are talking about are the sectors that L&T is deeply involved in. Several facets of construction will get busy if the government plans comes through. There has been an expanded fiscal allowance for the government through the budgetary provisions and endorsement by the parliament, that the government can both state and center borrow a little more liberally than what they did -- what they do normally. And secondly, the international money, especially the developmental funding is focusing on India because like us, they do believe India has rich prospects. And so we do think that a combination of government physical allocation and the international funding should see us have opportunities to bid in the areas of heavy civil or water, power transmission, distribution, et cetera. So we think that the granularity within infrastructure would be these areas. It's pertinent to note that in FY '20, the Infrastructure segment backed orders worth about INR 98,000 crores. And in FY '21, we have backed orders worth INR 102,000 crore. So if you see over a 2-year period and one of which has been considerably impacted by the pandemic, we think that around INR 8 lakh, INR 9 lakh crores of infrastructure spend happens in the system. And we have a share of possibly 15%, 16% out of that. So going by that same logic, we do think that out of the INR 6 lakh crore worth of infrastructure opportunities, we should be able to get that 15% to 20% share because I think country still needs health care facilities, country still needs transportation infrastructure facilities. Urban congestion continues to be a problem and a headache for municipal corporations. So given the thrust on climate, both metros as a means of mass transportation, as well as green energy in form of solar, et cetera, is getting the required attention. And it's also getting international funding support because these are a broader theme on preserving the deterioration in the climate conditions. We do think that the opportunities around data centers and IT spaces will continue to engage us because there's one industry which has actually thrived in the pandemic has been the technology industry. And India is blessed with abundant talent for this technology innovation. And we are also serving as a large backroom for global organizations, be it their normal processing or R&D center or any of those kind. So we think that some of the inflationary pressures that are there in the raw material prices will also make it interesting for the manufacturers of these products to step up their capacity. So we do think that some amount of activity will happen around the factory space as well. The government has also been focusing on spending a fair bit around public spaces. And we've been seeing stadiums and large public facilities being put up, including the hospital facilities. So we think that the Buildings & Factories segment also will see some traction. So considering all of this, we do think that notwithstanding the current low sentiment, we have to stay positive being in business. We do believe that this time over, the country has got a little better wherewithal to deal with the virus as compared to the previous time. Previous time, we didn't know there's a black box. Now we have vaccination. We have health programs, et cetera. The challenge is around rolling all of that out to cover majority of the population remains. But notwithstanding that and hoping that things will get better from second quarter, we are looking to the current year as a promising year for domestic markets. International markets, you are right. I think the previous year was a little uncertain. But as compared to India, many of the international geographies have actually done better on the COVID management because their population was much lesser and the complexities, societal complexities are also lower. So we see some of the economies coming back to growth mode. With the rise in crude prices, I think Middle East also will begin to revisit their plans for Hydrocarbon. Except that nowadays like in India, our presence in Middle East is more widespread across verticals. We are not only dependent on hydrocarbon in Middle East. The way we are scaled up in India across verticals in a much more modest way we have scaled up in the Middle East. So I think we will get engaged with their multiple programs. Africa has been a land of opportunity. But except that it is too large continent with several countries and very, very different dynamics, sociopolitical dynamics. So we are trying to mark the spots where we can operate safely and be meaningfully contributory to the local society. So we have taken steps to explore and gain some foothold in the business of power transmission, distribution, water. Like India, in fact, a few notches lower than India, basic facilities are still a luxury in parts of Africa. So I think much of the investment will happen around the base infrastructure and not the sophisticated infrastructure. We do think that will happen. Water has been a major issue. I think both preservation, transmission, distribution, storage, treatment as well as desalination solutions are being explored in India. It's lifeline for the country. So considerable attention of the states have been going towards water, and we are almost pan-India in terms of water opportunities. So I think between all of this, there is a good reason for us to remain hopeful. Of course, the pandemic permitting and things getting better from where we are today in at least in 2-odd months' time.

My second question is on Infrastructure segment. There has been improvement in EBITDA margin. So can you please quantify the one-offs in the particular quarter? And how confident you are of maintaining this margin given the commodities inflation in the past few months?

There is no one-off that I'm able to recall in the margin improvement of either the quarter 4 or the current year. Current year, meaning FY '21. It's a function of several things that happened. Margins, unfortunately, in our business is not just a function of 1 or 2 parameters, it's a function of several parameters. The mix of jobs, the progress on those jobs that we achieve, the ratio of jobs which are at margin recognition threshold, the degree of cost releases that happen when jobs get completed and handed over, the release of cost contingencies hence, also the price variation settlements that happen during the course of execution as well as in the conclusion of the job, all of this kick in. On top of that, there is the execution efficiencies. Our ability to procure smartly, our ability to execute the first time right, our ability to automate the processes. One of the interesting things that the company has been doing over the last few years, under the direct push given by our CEO, is digitalizing the entire process of manufacturing, construction, engineering, et cetera. We are today far more evolved as a company to use automated levers, use machine learning and the intelligence around the data that we gather on productivity of main machines in the businesses that we deploy them in. Now we have connected machinery. We have tracked workmen. We have got productivity measures defined for many things, including drone-based surveys, et cetera. So consequently, I think while inflationary pressures in terms of input costs being select commodities or wage, et cetera would be a matter of, in fact, regular attention for the business. These productivity levers enable us to be far more consistent in the quality that we produce, far more precise in our estimation in quantities and in bidding process. So it's overall efficiency that I would attribute to for improved margins. As far as our confidence about this being a continuing factor, I think the effort would be to ensure that we sustain margins. If you have been watching us over a long period of time, when I'm talking about a long period of time, I'm saying, let's say, last 10, 15 years, we have been through several cycles of commodity prices going up and down and the inflationary pressures playing out as well as the economic development being between swing, between high and low. But one redeeming feature of our performance through this period of 10, 15 years has been the margin trajectory. We've always been around 8% to 10%, 8% to 12% margin company in terms of bands. There are often one-off years where some projects that we execute has cost overrun, that's inevitable in our business, and not getting adequately compensated by cost savings in other projects. In such cases, we have some spike in terms of costs and hence, margin deflates. But notwithstanding all of those, we have always been rocksteady in terms of our margin profile. So we do believe that we have the wherewithal to deal with these volatilities and maintain the margin trajectory that we are known for.

The next question is from the line of Sumit Kishore from Axis Capital.

Sir, my first question is, where are we in the private CapEx cycle presently? The share of private orders in the India order book of L&T is at a record low. How do you see this shaping over the next 1 to 2 years?

Currently, it's about 18%, and it's been so last year as well. So not much change has happened in the last few years. In fact, even pre COVID, if you really trace back from 2016, '17 onwards, I think the economy has been a bit lackluster in terms of investment. And the private sector having got out of a bout of investment between 2006-'07 to about 2014, actually, we are taking a breather. Much of the private investment we saw spike up is in the areas of public infrastructure assets. And many contracting companies recycled their profits and capital into owning infrastructure assets, so did L&T. And the belief was that on completion of these assets, there would be a takeout that is feasible. The insurance companies and the pension funds were actually ideal candidates for owning all of these assets would possibly step up and invest in these assets and help the initial investor to recycle the capital. But that is not to be. And I think the challenges of owning public infrastructure and dealing with the government concessions continues to evolve and if it possibly is still a little distance away from being the ideal model concession agreement, which will facilitate very smooth transition of completed assets to the next set of owners. But having said that, the industrial CapEx has always been a function of opportunities in the economic environment. Whenever we find that the products and services of the private sector companies are looking promising, the private sector entrepreneurs have come in forward and invested. I mean, it's sort of once in several years, development like what possibly the investments that some of the major companies did when they changed their focus from traditional businesses to new age businesses. But we do think that once the inflation stays at a steady clip, the monetary policies continues to remain attractive for capital to be invested and the global markets for products and services continue to remain stable and positive, the investments will happen. The format of private sector investment can vary, it need not be only on industry. We have seen that it be on logistics. It was in services. It was also now moving towards supply chain infrastructure as a country and some health infrastructure as well. So I think private sector capital will first have to delever. Most of the balance sheets that I see are levered now. In the next couple of years, I expect them to unlock some capital, repay some debt, create headrooms for their investment. But my belief is over the next 2, 3 years, the private sector share could move from this 18% to possibly anywhere between 25% and 30%.

My second question is we saw the high-speed rail contracts, particularly a large order last fiscal. On that base, you have given a guidance of decent growth. What are the big ticket order prospects for FY '22? And when I say big ticket, maybe INR 30 billion plus for L&T both domestically and overseas, which areas do we see these contracts coming from?

See, I don't think it's a good idea to just focus on big ticket orders only because these kind of orders like the one in high-speed rail, that's not happening every now and then. In the past, we've had opportunities to build all the international airports in India. So they became a big ticket at some point in time. And then we have this high-speed rail. Otherwise, in our country, we believe in comfort of numbers. The government tenders are generally -- or public sector tenders are generally more geared towards attracting more participants. If they aggregate all the bids or the projects into very large projects, very, very few companies will have the balance sheet capability to bid, L&T might bid. But I don't think the clients would prefer just receiving 2 bids or 3 bids. They want to see possibly 6, 7, 8 bids. And that can happen only when you break up the projects into its sizes. So I think it is not going to be possible for L&T to only focus on big prospects. It will continue to focus on modest -- more modest projects. But having said that, I don't see large bids like the high speed as a normal thing. It's one-off and lumpy.

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

Congratulations on great earnings. Would you be able to comment upon whether the under recovery in the past year are likely to get paid or not? Where are the discussions with the government and other clients?

See, normally, all these discussions go all the way up to completion of projects. I mean you can visualize, you can step into the shoes of a client and visualize that you commissioned the contract. The contract does go through twits and turns, and many of these are understandable, documented. So the clients are generally empathetic to what has happened. The under equities have happened because we were not allowed by the circumstances to perform. So I think the clients do realize the situations. So I think instead of guessing what would be the outcome, our approach has always been to complete the jobs to client satisfaction, not use these excuses for abandoning the project or not completing the project. Our business teams have put their lives online in making sure that they go ahead and stay connected, committed to the project and its completion. We do believe that with many of them, while most of them being repeat customers, there is a deep relationship between L&T and the success of their own enterprises. We do believe that there will be fair consideration given to all of this. And I should hope that through conversation and negotiations, we should be able to recover much of it, whether we recover 90% of it, 80% of it, et cetera, time will tell. But we are reasonably confident because I think we are well prepared to hold these conversations.

And I presume that once this comes in, they will only provide an upside to margin. There is no risk of any write-off from the previous year?

Yes. The costs generally are getting accounted as they are incurred. And of course, just as there is an opportunity for upside right until the end -- until the execution and completion of the project, there is also cost escalation prospects right through to the end. The job is not done until it is done. So we've been balancing this quite well as an organization. I suppose we will continue to do that going forward. Whether it's only upside and no downside, again, time will tell. But our endeavor would be to retain down side and not let down side slip in.

Okay. Got it. Secondly, can you comment a bit upon what drove the margin improvement in Defense and Heavy Engineering, both seem to have done quite well this quarter?

See, as we complete large projects -- I did mention in another context, that when projects get completed, the cost efficiencies completely play out because we bid for projects based on estimated cost over 2, 3, 4, 5 years, depending on the length of the duration of the project. And as the project gets completed, the efficiencies play out. Some of them do it progressively through the quarter. Some of them do right at the end. Normally, we do operate with contingencies, cost contingencies because we don't know until the project is done as to what will come and hit us. There's no point in releasing margins ahead of time, paying tax on it, later to write back and not get the tax concessions. So many of these areas that you mentioned about Defense, Heavy Engineering, et cetera, there have been large order completions, large in relation to their business, not in relations to Infra business, completion during '21. And some of them, in fact, in Heavy Engineering also included some extra consideration for early completion. So I think it's been featured. But generally, the margins for these businesses are very reflective of high-tech manufacturing that we are engaged in. So we do believe that the margins would be at a considerable premium over the infrastructure margin.

Okay. Excellent. My third question is on the pace of construction. Right now, we are hearing a bit about exodus of migrants. And are you seeing the same thing? Or is it more media related?

No, I don't think it's media-related because I think it is a reality that last year, we lost considerable amount of people. In fact, the strength came to almost 60,000 people in our various sites. And it was a massive, massive effort by our teams to get most of them back. As we closed the quarter, March '21, we were operating at close to 240,000 people in our various sites. And we were looking -- given the large order book that we have now, we are looking to actually step it up to possibly 2.7 lakhs, 3 lakhs people. But this second wave has thrown spanners in the wheel now. We have a new issue. Only difference this time is rural India is not spared from this pandemic. I mean there are enough reports to indicate that the villages are not necessarily more safe than the cities. So we've been carrying on extensive communication to our workmen saying that it is safe to remain in L&T sites and not necessarily risky proposition, considering the lack of health care facilities in their hometowns and the fact that thanks to some indiscretion of our large public who participated in huge gatherings and when scattered back to various villages carrying with them possibly their disease. So I think there has been a reduction of 20% of the people having sort of wanting to go back out of their anxiety to villages, et cetera. But it is nowhere near the mass exodus that we saw last year. But we do hope that with the plateauing of the infection rate and death rate coming down, particularly in the large cities and towns that we operate our projects in, the workforce will begin to see sense in staying safe at where they are. Across the company, it's taking enormous efforts to step up on the health care facilities that are provided at our labor camps, including running quarantine centers and providing health kits and ambulances and stuff like that. So I think they will realize the safety of staying and working at our sites rather than running home.

The next question is from the line of Ankur Sharma from HDFC Life Insurance.

A couple of questions. One was on the Infra segment growth for the quarter, so at about 5% overall. And when I look at the domestic piece, it's about 3% coming off of a slightly weakish base of last year. So just trying to understand, what are the constraints for one of our largest segments, if not the largest in the company? Is it labor? Is it payments being slow? Are there any other constraints which led to this slightly subdued growth in the quarter?

I'm not sure whether the base is small because I just mentioned a little while ago, Infrastructure sector won close to INR 1 lakh crore last year. Actually, it is INR 98,000 crores. And this FY '21, we have won orders worth INR 102,000 crore. I think it is a massive number.

I was talking about the sales, sorry not the orders, I was talking about the execution.

Okay. As far as execution is concerned, I think Infrastructure by definition are a little longer-term duration as compared to the normal, let's say, a factory order or a typical residential building order, et cetera. So the execution does pick up speed as the project progresses. The initial period often goes in getting the engineering cleared and the procurement planning done, et cetera. It gathers space -- if I were to divide these projects into 2 halves, 2/3 of the work happens in the second half and 1/3 of the work happens in the first half. Depending on the mix of jobs that we have at any point in time, be it a quarter or a year, the majority if it is going to be falling in the 1/3 bucket, you will find a softer execution. And if you find majority on the other bucket, then obviously, you will see pickup in pace. The execution challenges remain around the clearances, time delays around clearances, the right of way. And that unfortunately, Infrastructure business and the project involves the right of way, especially projects with [ linear access, ] land acquisition and compensation settlements. And now we have additional layers of environment clearance and then the public interest litigations, all of that the companies go through. In many of these projects, it is not possible to have all of this precleared and then the project given so that the execution happens almost in a robotic manner. It doesn't happen that way. Many of these clearances are taken as we go along, and that is the way the project business is. So to that extent, the challenges are centered around access clearances. Our ability to manage a large workforce has been time tested. We do think that, that will not be a challenge. Unless, of course, there are disruptions like the current times where people have other reasons not to assemble at sites. Productivity and skill upgradation is a major task. I'm not calling it as a difficulty, but it is a task. And as we try to automate our construction and delivery capabilities, we also make sure that the workforce that come in are more aligned to these improved productivity norms. As we keep scaling up our operations, we need to naturally increase the number of people we employ, either through subcontractors or otherwise. And once you have these large number of people coming and several of them possibly not adequately trained, safety does become a big issue. And I think the company is spending a lot of energy in making sure that the safety protocols are well understood, well defined. And as and when we keep having new people come into our sites, that these guys are aware of what are our expectation out of these safety standards. You should realize in our construction side, the laborers, the gang, keeps turning around at least 4 times a year either because of harvest and sowing requirements back home in their agricultural part of their family or because of wedding or because of festivities, the churn in the labor camps happen easily 4 times a year. So every now and then, we have to deal with training a new set of people. So productivity, safety, et cetera, becomes challenges for a company like us especially since we pay so much emphasis on these.

Fair. Okay. That's helpful. Sir, broadly, then the current order book of close to INR 3 lakh or INR 30-odd crores is broadly executable? Or do you see any sizable slow-moving orders there?

Generally, we have been, of past few years, we have been purging slow-moving orders out of our backlog, not because the clients have canceled those orders, it is just that our assessment that the order book that we reflect should be a workable order book. So every now and then, this spring cleaning happens of the order book that we have. We do believe that the order book that we have is workable. There's always a possibility of 2% to 3% of these orders developing some slowness. That's the standard thing that we have observed over time. So barring that, I think this order book is workable order book.

Fair. And just one question on the order inflows, and you've given a pretty detailed in the kind of on potential orders. But when I look at orders, starting from February, there has been a marked slowdown in terms of order finalizations and that has kind of continued into May as well, especially from the state side. Even when I look at our full year orders, excluding the high speed, and when I look at the state-specific orders in, say, water or T&D, that's clearly been a little subdued. And given the COVID and the state focus on controlling that, do you believe that even going into '22, it's more of a second half when you see state kind of ordering coming back once this whole COVID thing is kind of resolved?

In a non-COVID period, my reading has always been that a lot of action picks up in the second half of the year because of the budgetary reasons for consuming the budgets, et cetera. A lot of work happens in quarter 4, where either awards are given or project is commissioned or even settlements of payment happens because there is a focus on consuming the budget to be eligible for additional budget in the budget year for the state governments and central government projects. So I think there has been a bias towards second half, no doubt. And like last year, this year, the first half -- first quarter, at least so far, the government, both state and center is so preoccupied with safety of people. I can understand that the attention is a little diverted at this point in time. But we do believe that by the time confidence return to the system that the health care infrastructure is be able to cope with things, vaccination is better done, et cetera, et cetera, we do expect from August things to improve. This was the pattern last year as well. So I expect FY '22 to be pretty similar. So I'm not reading much into the slowdown, as you rightly observed between March end date, but I do expect things could change.

Fair. And sir, if you could also, on the internal orders of close to about INR 103,000 crores, if you could kind of break that down into B&F, water, T&E, Heavy Civil, the breakup which you normally give so that we can have a better comparison over the previous year?

See, water and power transmission normally are the bigger lots out of this because pan-India is -- that happens. So these are around INR 20,000 crores sized businesses. Then we have the Buildings & Factories around about INR 10,000-odd crores size. And the Transportation Infra will be around INR 11,000 crores, INR 12,000 crores. And Heavy Civil has been a big year for us, with high-speed train in order of INR 20,000 crores. So we are possibly looking at Heavy Civil at current accumulation at about INR 35,000 crores, INR 36,000 crores. So that broadly will add up to your INR 1 lakh crore that we have...

Okay. Okay. Okay. And sir, just one last one, if I may just squeeze in. On the margins, specifically, and I think this was also a previous question. So we've seen a pretty sharp improvement Heavy Engineering, it depends at close to 29%, even Hydrocarbons at 13%. Even when I look at the press release, there are some mentions of some claims settlement, some lower ECL provisions, et cetera, also sitting there. So just to clarify, I think you mentioned that it's more of job completion and less of claims. Is that how we should read it? It's more of better mix, better productivity and less of claims over there, is that how we should be read this?

Generally, in our project business, claim settlements is part and parcel of our niche. It is embedded in every quarter. There are some quarters where the claim settlement plus jobs reaching margin recognition threshold combined. There are also some quarters where the claim settlement and handover and, hence, cost contingencies release combined. So very difficult to pinpoint saying this is what it is. If you have to do that, you'll have to get into each of the 1,000 jobs that we execute to see what has contributed where it's very, very tough ask. But broadly, you can conclude that these spikes are function of the job mix at a particular point in time rather than anything unusual or abnormal.

The next question is from the line of Renu Baid from IIFL Securities.

Congratulations for a good operating performance and the balance sheet repair that we have seen. So my first question would be on the margins for the Infra business. Though historically, we haven't seen any clear correlation between the commodity prices and operating margins, but we haven't seen -- we have not also seen the unprecedented jump in steel prices the way we have seen in the last quarter or so. So when we look at your broad margin guidance of flat numbers at 8.5%, what we saw last year, does this bake in cost implications because of inflationary impact on fixed price projects or some hit coming on that side as well? Because until 2 years back, before you had the provisions for transportation and last year for COVID, our margins in Infra used to be 9% to 10% range. So if you can help us understand what are we baking in terms of cost margins for '22? And by when do we expect core Infra margins to head back towards double-digit level?

See, I think it's a function of several things, right? I mean as the country evolves, as the competitive landscape becomes more and more mature, ability to sustain double-digit margins in infra business, particularly, where the prequalification is getting lower and lower. So function of our margin reporting, it also depends on the economic moat that gets created. Now it is good from one perspective that there are multiple people who are capable of bidding and delivering, because one L&T cannot build entire India. You need multiple agencies. So from one perspective, it is good that there is competitive pressures. And it is also equally important that as we upgrade our participation in project business, the investment that we need to do to keep our skill levels high also has to be accounted for. We cannot let -- I mean the kind of skill that we needed to build an airport was way different as compared to the skill that we needed to put up a residential complex. And the kind of skill that we need to now deliver the high-speed rail or the trans harbor bridge across the sea is again, way, very different. So every time when this is to be done, it has to be reinvested. Skill has to be reinvested. In IT industry, I think people are able to very easily accept the reinvestment of skill and accept in the margins. The same thing happens in our industry also, except that the play is half. IT industries are able to report 20% to 25% PAT. In our business, despite all the risk of working under the sun and the rain, we'll end up making possibly 8% to 10%. But as the mix of portfolio that we have between commoditized infrastructure build that we do and the sophisticated infrastructure that we do, and depending on how much of it is outsourced, how much of this is in-sourced because we have an integrated model of engineering design manufacturing as well as delivering on the construction. Depending on how integrated the model operates, we've been operating on a band of 8 to 12, and you can take -- refer back to our performance over a period of time that the band has been between 8 and 12. Depending on the mix, depending on the complexity of the job and the competitive landscape, we've been operating at 12. And I remember on such calls whenever we had reported around 12%, saying that this is not likely to be sustainable. Nowhere in the global EPC landscape will you find this kind of margin. So -- and also the fact that we are now stepping out, we are into Middle East and 35% of our presence in terms of order book is international, between Middle East, Africa, et cetera. All these countries require investment. And where does the investment come from? Investment comes from redeploying the money earned in projects only. So to that end, I think we are quite okay in looking at the margin profile of this 8% to 10% band as compared to 8% to 12% band given the way we look at building our business going forward. Well, our effort is to keep moving up. We have -- as you might have heard, about 60% of our projects have vastus. So to that extent, all these inflationary pressures, we'll have some way of readjusting the price with the customers. Of course, 40% of the jobs are fixed price contract. But we know that we are bidding a fixed price contract as we sit down to bid. So there is cost cushions that gets projected, especially when we sit down to price the bids. And hopefully, this inflationary thing will operate within the cost cushion. So my belief is that when we talk about stable margins, it's more a directional thing that we are giving. We do expect FY '22 to continue to have challenges, but there are definite unknowns in the year ahead, because I don't think we are back to normal times asset. So given all of that, I thought the best effort for the company would be to make sure that it hangs on to the margin that it has been able to make. But despite COVID, we did improve by 30 basis points. So effort would be to see how to keep moving up, but I don't want to speculate on a commitment today. But the trajectory there, the focus of the company is clear. It will work to optimize on March.

Sure. That's helpful. So the second question would be to understand globally now we are seeing the entire energy transition towards decarbonization. So you're -- at L&T, how are we looking at this opportunity? And are there any businesses except for the power division portfolio, which would face challenges on account of this? So what kind of steps are we taking to improve the capability towards an expedition energy technologies and practices?

We are looking at it more as an opportunity than a challenge, because I think to consider something, you will have to describe something. So to that extent, including business models, need to make way for newer models. The entire energy space really go through transition. The way the fuel was being used, the way hydrocarbon industry operated, the way the power industry generally operated, all of that is undergoing change. The company is this -- I think streets ahead of the competition in India, insofar, as this transition is concerned. You would have read in our reports that we won 1 of the largest solar project in Saudi Arabia. We've been working a lot on water technology -- both in India and water solutions, both in India and overseas. We have, today, hydrocarbon and power as 2 leading businesses, which will evolve into greener space. Already, our buildings and factories have adopted green technologies, considerable amount of -- many of our buildings are certified as green buildings. So to that extent, I think it is the energy space that will see the transition. Company has set up task forces to explore the new opportunities, and I think we are in the middle of the work that we are doing on this. And hopefully, in some time, we should be able to spill out the specific plans that we have. But we have seized of those opportunities, and we are working aggressively at it.

Sure. And one last question, if I may. Any update in terms of the restructuring that was being worked out for Hyderabad Metro progress and discussions with bankers and our divestment of the power assets. So has that also hit the second wave, dropped the roadblock or some things are in progress on that front?

No, I think these are all irons in the fire. There are a lot of discussions that are happening. But as you know, we don't want to throw the baby with the bathwater. These are top class assets in terms of their functionality. It is unfortunate that these assets are receiving attention at a discount to their potential price because of the environment, because people who want to buy these assets have a lot of options today. There are a lot of distressed assets available, so there must be a very good reason as to why they pay premiums to our assets as compared to an alternate asset that is available. So hence, the discussions are taking more time. We are okay with it, because I think it is important to find a good home for all of these assets. We do think that the power assets will move towards closure. I'm not in a position to exactly predict a time line, because I think internally, we've had challenges in meeting the time line that we have set for ourselves because of this environment. But we do hope that sooner than later, we can move towards some of those solutions. Insofar as Hyderabad Metro, it's a very, very -- it's a top class asset housed in a very long concession, but unfortunately, completely exposed to the pandemic. Today, the ridership is next to nothing considering the restrictions and the lockdowns and all of that, that has happened. So the restructuring has to have multiple efforts. The bank loans that we have raised during construction has to be refinanced. The efforts are on towards doing that. We also need to monetize our transit-oriented development space. The efforts are on towards that. And as you know, any real estate transaction in a time where there are a lot of uncertainties around utilization of space, particularly commercial because the transit-oriented development that we have is commercial. It's understandable. So that's also a work in progress. We have been having several rounds of discussions with the government on formation of fair fixation committee as well as the grant that they would be required to provide. The good news is Telangana government in their state budget has accommodated INR 1,000 crore allocation for metro projects. We have to make sure that we find a way to translate that through the bureaucracy of the state to find its way to the project. But all these are -- when you deal with governments and especially deal with governments, which at a time are more preoccupied with the health care, does take a lot of effort. But my sense is that during the course of the year, these multiple steps, one by one, we need to tick off and move forward. Meanwhile, we hope that the ridership would improve. But ultimately, the solution would be if the ridership improves for the project, and for ridership to improve, I think normalcy has to come in. It's a fantastic transport solution, very transformative for Hyderabad. And Hyderabad is a very growing metropolis. And unfortunately, much of the people who commute or whom we thought they will commute are all IT industry people, and all of them are working from home. So to that extent, I think there has to be some redefining of the work arrangements for the metro. So I think you're going to keep hearing about the metro being a work in progress for some more time. And I don't think -- it's not an easy one-step solution. But rest assured, I think all the powers that be in the organization are working hard towards finding these solutions.

[Operator Instructions] The next question is from the line of Amish Shah from Bank of America.

Congrats on the results. My question is actually still on margins. You spoke about productivity gains. But specifically within the fourth quarter, the company has also reported improvement within gross margins. And this is certainly something that the company is doing to circumvent the impact of rising commodity prices. So if you can please share some perspectives on what are we doing to not have the commodity price impact us. And from an FY '22 perspective, is it fair to say that commodity prices will hurt margins, but productivity gains will help cushion that impact?

That is right. I think not only productivity gains in a very limited way, but I think the overall cost efficiencies will also kick in, because I think one of the things that the pandemic has taught us is to work in different ways, which helps us in containing some of the costs, which we used to take it for granted in the past life. Insofar as margins are concerned, I think one of the important levers also last few quarters, we were pushed back by some of the stressed projects in the transportation infrastructure sector where cost overruns were actually deflating the margins. And in quarter 4, the transportation infrastructure business has returned to black having left behind those stressed projects. So one of the large businesses coming back to black also helps the margin recovery, which is what is expected to be normal. We actually slipped back because of some of these cost overruns. But we hope that, that will be a thing of the past, and we should be able to move forward. The order backlog that we have, which will currently translate into revenue for FY '22 appears healthy. Much of these have been bid through and won through the period where the inflationary pressures were visible. Whether we are completely insulated or not, time will tell. About 60% of the projects we are sort of insulated by price variation formulas. The other 40% versus the inflationary assumptions that we have taken, whether it plays out needs to be seen. Of course, not all of this needs to be bought today. See, the procurement also happens over time. And we have some headroom to time the procurement as well. And so I think the company is very seasoned project execution company. So I'm sure our team will try to find levers to optimize. And secondly, we are also large buyers. So the relationship with our vendors normally transcend beyond small transactions. So we'll also try to find out a way to deal with the supply chain on some of this, negotiate well. And of course, the customers appreciate extraordinary times. If there are going to be extraordinary price movements, there will always be an empathy to the current situation. And they do realize that -- I think the project cannot prosper on the ills of a contractor, right? I think there has to be a healthy relationship. So I'm sure we will deal with this. It is not the first time we are in this kind of situation. We've been there in the past. We have sort of survived and managed. So I think we're hopeful.

Okay. And then finally, 2 quick questions. One, right now, the skew of order book is completely in favor of state governments in comparison to central government. But from an order flow perspective in FY '22, should we expect the ratio to move the other way around? And finally, and I also wanted to ask about the large $6.5 billion of cash balance that we have on books. So if you could please share some thoughts on what are we planning to do with that, too.

See, insofar as percentage skew, it depends on which projects come through and which don't. But I think it is safe to presume, I think state followed by PSUs followed by central government will be the picking order. So it's important that the state government find their means, either their own means or through funded assistance to go through with their projects. So I think the percentage, I don't expect in the context of FY '22 to be very different, give and take a few percentage points. Insofar as cash balance, I think 47%, you would have read about we having declared INR 18 per share dividend and on top of INR 18 that we did as extraordinarily earlier, so the regular dividend of INR 18 per share represents almost 46% payout of the recurring profit after tax of the company, which I think is a fairly good share. Whether it's fortunate or unfortunate, I do not know. But because our portfolio of business includes financial services business, SEBI in their wisdom are considering the consolidated debt equity as one of the criteria for allowing the stand-alone LNG to do buybacks. We had approached SEBI 2 years ago with a proposal. And SEBI said that you run financial services business, so we'll have to take the debt of Financial Services, along with your debt to decide the buyback post. The debt level post buyback is up to the prescribed law, which can never be because financial persons by nature is to borrow and lend. So we've tried in vain so far in convincing SEBI that that's not the right way to go. So unless the regulatory mindset changes to pass cash back to shareholders in terms of buyback seems to be a bit challenged policy-wise now. But from about 28%, 30% payout, we have stepped up to mid-40s now. And I think that is something that should keep the shareholders interested. Now we obviously have built in some cash buffers because of the extraordinary pandemic situation. It is not normal for the company to have this kind of cash reserves. But it has done so because of just in case, I mean the liquidity in the system gets on to panic mode, et cetera. And given our commitment to the huge order backlog that we have, we can never run out of cash for maintaining our contractual commitments. So there is a buffer that we are carrying, but that's more a time -- point-in-time situation. We would like to use that -- we have created this buffer partially by operations and partially by borrowing as well, so we'd like to possibly also run down the borrowing out of the buffer. Plus, we are having a large project on hand in terms of Hyderabad Metro. Last year, we allocated about INR 1,000 crores to Hyderabad metro. We might have to keep considering INR 1,000 crores to INR 2,000 crores of reserve for that business as well. So if we do that and find some long-term solutions, I also expect shareholders to enjoy some share price appreciation. Today, I do believe share price of L&T is depressed because of this exposure to Hyderabad Metro, and we are able to find some solutions to that. The gains to shareholders will come from multiple parts. One is the largest dividend payout that we are doing. Second is possibly the better performance and better appreciation of share price.

That is very helpful. But just to clarify, are you saying that special dividends can possibly be a norm for the initial few years?

I'm not sure whether you can call it a norm, because special dividend is special. So we need to have an occasion. So let's hope we get occasions.

The next question is from the line of Lavina Quadros from Jefferies India.

Sir, I just wanted to understand how is management looking at L&T Finance. Is that a business you'll want to continue to be running in 5 years' time? Or is that something that you will look to restructure with time? Just your thoughts over there, please.

I think it's part of our services business portfolio. And I do think that the business has opportunities. It has done well over the past 20 years. It's not a green on. In the sense, it's been there for -- in our portfolio as 20 years. And I think in our credit delivery system, there is a space for nonbanking companies. So at the moment, our thinking is that we will continue to keep that as part of our services business and manage it well so that it can also contribute to the shareholder value creation.

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

Congratulations, [ Shankar Raman ] sir, on your reappointment. I have just 2 questions. In the media call, I think you did mention some growth guidance. So if you could clarify what exactly did you say on the revenue growth side and ordering? So was it low to mid-teens on our core business? Or was it the consol? And secondly, just on the ESG side, congratulations, the fatalities are down to 25. So you can you just highlight the steps you are taking already to bring this down further?

Yes. Thank you. See, in terms of margin guidance, let me articulate once again. Last year, we were not in a position to indicate anything at all, because we didn't know it's a new situation, completely new situation. This year, helped by the recovery of quarter 3 and quarter 4 and looking at the order book that we have, we have made some assumptions that the current wave would plateau and possibly, things will begin to return back to normal from Q2 onwards. That's one big assumption. The second big assumption is the government will rediscover its part to implement the budgetary plans that they announced in February by continuing to invest in the economy. The third big assumptions that we have made is the kind of market support for funding these projects would continue to happen, and the country would be a destination for some of these investments. These are fundamental assumptions to our outlook. Our outlook for '22 has been one of growth. Last year, we were looking at degrowth and our best case scenario was to meet up with FY '20 levels. And I think we almost got there, and I think it's credit to my business colleagues for having got us there despite a 5-month hiatus last year. So this year, our mindset is to grow on the basis of FY '21 numbers. We're -- they're not in a position to hard code the guidance, as we normally do because of, a, it shouldn't appear very speculative and misplaced. So the way we are looking at it is that if I'm looking at growth, both in terms of orders and revenue, our projection seems to indicate that anywhere up to mid, low teens to mid teens could be the potential for this growth to play out. Where exactly the growth percentage lands us, we will know as we go along, because even now as we speak, we are still not solved all the uncertainties ahead for the year. It is more out of mindset hope optimism that we are making this projection. So we said anywhere, both revenue and order, so anywhere up to low teens to mid teens is what we see. And we said stable margins. Now revenue is a function of our execution of order book, which is there with us now. So I think the execution headwinds permitted, we should be able to move forward and execute, because we are not dependent on winning in order this year to realize revenue for this year. They're all in the bag. We'll have to only find a way to have them executed. Order inflow is a little more difficult to predict because of the uncertainty inherent in that projection. So we are putting out a best guess, guesstimate, if you can. And hence, we have set a range of growth up to this place.

And just on the ESG point, sir, fatalities in...

Yes. I think we're not happy with 25. Actually, we are -- our mindset is a 0-fatality company. Just as we are saying, we are a 0-emission company. So 25 bothers us. I was told it is 41. But every quarter, we have a very detailed discussion at our Board, the highest body in the company, about each of these cases. And a lot of details are gone into. I think workman's safety is something that we constantly have to work. We're doing a fair bit of work on this already. I think every site, every morning, there are safety protocols and drills that are done, et cetera, et cetera. But there is always this case of a stray worker or malfunctioning of an equipment or an accident. We've had things like people resting under a shade of an equipment and the equipment gets disengaged and runs over them or whatever. So all these kinds of mechanical small function also has contributed. We have worked very hard to bring it down, but I don't think we would like to rest. We want this to be 0, fatality to be 0. Very hard to prescribe that this will happen by 2 quarters, 3 quarters, 4 quarters, but the effort is towards that, and considerable amount of internal communication is happening. And since everybody is connected for work on mobile, the amount of small videos, safety videos, plus we use AR/VR technology to buy these equipments and make workers wear them and see them before they start working in heights, et cetera. So I think considerable emphasis is being done.

The next question is from the line of Amit Mahawar from Edelweiss.

Sir, I just have 2 questions. First, for Mr. Subrahmanyan. Sir, in your assessment, so last year, COVID did impact far poorer than what we thought. And this year, do you think in terms of site execution, the kind of compliance we have to follow, that is the reason why our guidance in '22 is far lower on a low base? Or do you think we have been more conservative? That's my first question, sir.

To answer your question, COVID did affect us last year, and I think we put in sufficient measures to come out of it in the fourth quarter. And we had practically got back our momentum and the sales, and profit growth in Q4 reflects that. One never expected the second wave as it has happened. It has happened in the magnitude that it has happened. It has happened. And one has to be a little cautious about it from that perspective. So what our side has indicated as low to mid-teen growth is basically double-digit growth for the year. We will see how it pans out because of this uncertainty for the COVID still around us, to make bold statements is not correct and not proper to as there is caution being exercised in all aspects of operations, including supply chain and such as aspects of our work. Let's hope that with the huge measures that have been taken both by the central government, state government and many organizations, including ours that we're able to curb it within the next couple of months, and if that can be done with the learnings of last year and with the measures that have been taken, which are to be adequate this year, hopefully we should move forward more positively. But one is not in a position to predict it. So let's not look at it from a low base of last year. What one has to look at it is that there's a huge backlog at hand, one has to take it forward. Basically, our people and the company is prepared to go ahead and full blast on that, but one has to look at the environment and be cautious about what it is and one has to circumspect it, and that's what we are trying to put forth.

Quickly on the second question is on our ESG initiatives. Now as we understand, defense business has been one of the perception problem, if I recall it, especially to a lot of western investors. But do you think like other companies are thinking on the engineering side, we have defense and nondefense business, some of them can put the defense business in a different vertical? But that has a problem with DRDO and Ministry. So any thoughts you have on that? Can L&T think of putting those debatable businesses from ESG compliance on a separate -- as a business in a separate entity? Or do you think there is something which is not in our active thoughts, sir?

I think let's not exaggerate this problem beyond what is required, okay? I'm not sure why we got classified in the way that we have got classified. Our defense business is nothing but precision engineering and system integration and certain radar and other work that we do. We have clarified many times and extremely clearly that we are not into bombs, ammunitions, cluster ammunitions and so on and so forth. And therefore, to keep on saying why are into the defense business is not right. L&T is into businesses which are appropriate from the nation's point of view from taking our infrastructure point of view forward and from a national point of view forward. We do certain precision engineering and certain system integration, which we believe is an extension of our engineering and manufacturing activities from that point of view. And therefore, to classify us as some kind of a big defense contractors, is not right. Maybe one can even think of taking the name of defense and calling it precision engineering or something like that, but that's exactly what we do. And in my opinion, to put it separately, to classify it separately is not correct, because the kind of talent that we have free flows from our manufacturing into the so-called precision engineering system integration and back into other areas as invent requests. And that is what is the strength of the organization all about. There are a lot of engineering and learning in all of this, which we pass around. For example, today, DRDO wants to make oxygen generators. We have about INR 375 crores of orders from them to quickly meet these oxygen generators. Now why is it cost given by DRDO to a defense business is because they feel they have the engineers, the people involved there, the people who can quickly understand this can quickly put it together. Now if we go separate, I don't think we'd be able to do it because the process engineers are part of hydrocarbon. The certain amount of process engineers are part of our maintenance and metals. And all these engineers come together, both as engineers and as fabricators and manufacturers to put it all together. That's how the company functions. So in my opinion to make to make a drum and dance out of it is fine, but we are nowhere involved in any kind of ammunition or bombs or cluster munitions, et cetera, to be classified any such.

That's very helpful. Sir, just last question for Mr. Shankar Raman. Sir, out of all the provisioning cycle that we've made, the claims that we've submitted around COVID time, where are we in that cycle, maybe FY '21, if you can help us understand the impact, plus the impact of recoveries that has happened and possible number in '22? That will be helpful.

No, it's difficult to quantify because we are still paddling the cycle, and it's a constant process. So I think we are in a reasonable place. I don't have the data to say how much of what we have submitted as compensation we've got. I can only tell you that majority of the cases, the time extension that is required, that's the first step to be taken in all of this has been opened. So I think that's a good first positive step.

[Operator Instructions] The next question is from the line of Priyankar Biswas from Nomura.

So my question is regarding -- would you give some comment on the -- on your Realty business? Because as you see that we are, again, probably in a second phase of COVID and some bits of lockdown type situations in Mumbai. So how are you seeing the sales or inquiry momentum? And how do you see the year ahead, particularly on this piece? Like probably in some numbers, it would be helpful.

Are you saying? Or should I...

No, you go ahead, I understand.

Okay. Fine. Thank you. See, our Realty business is a very measured business. It's not that we are all over the country. We are in select markets. We are in Mumbai. We are in Bangalore. We are in Chennai. And consequent to Hyderabad Metro, we are present in Hyderabad. Much of the projects that we are doing are the land that has been made available by the parent company when it moved its manufacturing facilities, et cetera, to most competitive towns from the major metros. So we have time, because we have not paid any current cost of acquiring all this land and the interest meter is ticking. These are properties of the company, which has been invested many, many, many years ago. So to that extent, I think we have the ability to time the launches. We are able to do it in a phased manner. We are not forced to build everything and then try to put out in the market, so some demand-supply readjustment we constantly do. We've had a fairly reasonable year last year and maybe helped by the Maharashtra government's reduction in stamp duty. Since October last year and particularly in the last quarter of last year, the sales of Mumbai real estate properties that we were developing are pretty brisk. Bangalore has also been selling, because intrinsically, the project is extremely well located, and people who have visited the development are very, very pleased with the development that we are offering. And then Bangalore still continues to be a hub of young people working in the well-paying IT industry. So I think the tendency to own residential apartments early in their life is a big catalyst for demand to be there. So we do find -- given that we are very measured in our launches, the demand to be sustainable. We -- obviously, as we scale up and go beyond L&T-owned premises and look for joint ventures, we have a couple of them announced in Mumbai already. They've had a good start in quarter 4. We'll have to wait and watch as to what happens this year. But some of my experience is that investment in a house is much beyond just the season or no good or bad. I think it's a very fundamental household decision that people take. Earlier, there used to be a rush to book as the projects get announced. Nowadays, the tendency, given that the real estate sector has seen many failed projects, the tendency is to wait for near completion before people make the booking. So to that extent, there has been some readjustment of booking preferences in the market. Regulations like RERA has possibly helped, because it gives them comfort about a regulated space to operate in, and the people will not be left high and dry at the mercy of some unscrupulous developers. Companies like us have an inherent advantage, because of brand L&T. I think -- and rightly hope people do believe that whenever we launch a project, we will launch complete within time before time and handover. So good quality within cost. So I think that is going to be a major, major help. But at the moment, it's a space where we are very watchful and careful about what we will do going forward. But we have projects on hand. To keep us busy for the next few years, we have enough projects on hand.

So sir, what I meant was actually like what is the kind of the -- like the sales outlook that you are possibly seeing for this year?

Please understand the sales outlook as represented by numbers happens when the projects are handed over. There's a change in accounting regulations. And for real estate, the current guideline is that you account as sales only when you hand over a completed apartment. Earlier, it used to be like construction business. Progress used to be reported as sales having booked an order. That's no more the case. So you'll find all real estate companies having huge volatility in their quarterly numbers, because in some quarters, they are able to hand over more flats. Some quarters, they're not able to hand over more flats. For example, FY '21, the entire year, we handed over about 400 flats. In FY '20, we added over about 800 flats. So if you compare between FY '20 and '21, the handover has got lower. So the sales booked has got lower. We are looking at handing over equal or more number of flats in the current year. But again, it depends on whether people are ready to move it. We had a very funny situation. The flat is ready, but people are not willing to come in and take position because of COVID and whatever travel restrictions, et cetera, et cetera, et cetera. So it's -- multiple levers are at play here. So at the moment, it is safe to say that we will do same or better as compared to FY '21.

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

This is Pulkit. Sir, I just wanted to get a sense over the medium term of some of the businesses like our power development business, shipbuilding, defense. In many of these businesses, we've been seeing underutilization of capacity. So as we look at the next 4 to 5 years, and I guess your next 5-year plan, also, there's time for that to be drawn out. How should we look at some of these businesses where utilizations and profitability have been lower?

Power development is a business where we will monetize. We have no ambition of running a power utility. Some of them have been built in the past for a certain context. And those objectives having been met, the assets that we currently own as power development assets will get monetized. So I don't think there is any thinking around creating further investments in power development area. Insofar as the shipyard is concerned, it's a very precious asset. You would know in this country to get waterfront, that too very close to a metropolis, is next to impossible. We've been similarly lucky that we had an opportunity to acquire that waterfront area, and we are putting that waterfront area to multiple businesses. It is not only for defense. We are also using it for fabricating hydrocarbon structures, et cetera. So any -- it's a large space, so anything that requires a large area for fabrication, et cetera, and which needs to be transported, that becomes a handy facility. There are continuing interests in looking at large naval program. The government policy should permit, both in terms of speed of thinking and action as well as their mindset to utilize these facilities for ramping up. I think India's requirements is well documented. I think the Navy particularly since we're talking about shipyard is in need of definitely supplementing their arsenal. So it's important that multiple next-generation vessels, be it a survey vessel, be it a patrolling vessel or be it even a landing platform down for a warship, there is enough and more to be done, except that the government historically has been extremely slow and very, very reluctant about private sector participation. And the public sector shipyards are all overflowing with backlog running up to 5 to 10 years delay. And whenever we have got an opportunity, we have overemphasized the point well by delivering much, much ahead of time, years ahead of time, except the government is surprised at the speed at which we are able to do and they're not ready to take delivery. That's another problem. But as an asset, it's extremely precious, and I think it's a country's responsibility actually to use this asset well. And I think the governments, the power that we, are very, very familiar with our capabilities around this space. So in terms of the other defense businesses, I don't think it is underutilization of capacity because it's not so much of hardware and space lockup. It is a lot of engineering talent. As Mr. Subrahmanyan was mentioning in another context, they are all fungible skills as well. The engineers are precious resources for the country, and they're all very well-trained engineers. We do -- today, 2% to 3% of our revenues is from defense. So to that extent, I think the defense business is busy in its own way, except that can it ramp up and do much better, obviously, I think there is potential to do that. And we've not really ramped up and waiting for work. I mean like in the case of IT, et cetera, you don't have 20%, 30% sitting at a bench. There's no such thing that is happening in terms of underutilization. We always say potential for business is much higher than what it is today. I don't think it's a case of underutilization.

Sir, in the same breath, any ROE targets over the medium term?

We want to get back to 18% for sure. We came up to about 15.3% in our last part. In '16 to '21 strategic plan, we started '16 at 9%, and idea was to end '21 at 18%. We were well on our way because year-on-year, there has been an improvement. There was a road map as well, but didn't expect FY '20 and FY '21 to end the way it has ended. So to that extent, I think there has been a setback, but we are not going to lose focus on that. I think if you are able to do a couple of things, one, unlock from investments, which are earning less than cost of capital, and these are essentially the infrastructure assets, the concession assets that we own, sell the power equipment business, find some sustainable solution for Hyderabad Metro concession. Minimizing the loss by itself is a big lever for ROE improvement. On top of it, we are growing in our core business, and we are growing in our services business. So I think if these plans we speak to and continue to work hard as we have been doing, we want to keep our focus on 18% ROE.

The next question is from the line of Deepika Mundra from JPMorgan.

Sir, firstly, just on capital allocation. I just want to reconfirm that the core business, it seems that there is very limited capital requirement at the moment. So any thoughts on the company's larger plans or longer-term plans on capital allocation between E&C and services businesses both?

See services business are, other than financial services, are generating cash by themselves. So I don't think the parent needs to allocate any further capital to services business. The last large allocation we did for Services business was to acquire Mindtree. And fortunately, that acquisition has played out well. And we are doing well on that capital that we have invested. We invested when the share price was about INR 980, and it's excess of [ INR 2,000 ] today. So I think to that extent, that investment has done well. In our E&C business, the requirement has always been working capital. It never has been a large outlay of capital. Of course, we have to buy some strategic equipments whenever we get large projects, but that is okay because those equipments are -- the cost of those equipments are most often amortized over the period of the project as well. So I think that is not going to be a major trainer. Financial Services, we had allocated INR 2,000 crores last year to participate in the rights issue to maintain our shareholding. We do believe for the next few years, the capital that we have infused and the headroom that they have for growth should suffice. I don't expect any significant capital allocation for financial services business in the next couple of years. As far as Hyderabad Metro, it's work in progress. We allocated about INR 1,000 crores last year. I do think up to about INR 2,000 crores we need to set aside for solving some of the debt equity problems from Hyderabad Metro. The debt that has been contracted in that business was based on 7 lakhs, 8 lakhs of people traveling every day. It's a far smaller fraction as compared to that target number. So it cannot, at the current ridership or even projected improved ridership, sustain the debt levels currently. So we need to: a, refinance the debt to push the liability back; b is convert some portion of debt into equity or preferential equity; and third, we also need to get some additional equity investors. All of this are work in progress. Now other than maybe INR 2,000-odd crores, I don't see Hyderabad Metro to suck in more money for the FY '22. And in that asset, we'll have to take a call year-on-year depending on how far we are progressing on the several fronts that we are working on. So to my mind, much of the cash accruals -- and of course, we're trying to unlock from power development assets, et cetera, hopefully, that will generate some cash flow as well. So to my mind, there have not been big consumption plan for the cash that we are likely to generate in the following year.

Sir, my second question please would be in the international business. It seems like a pipeline for hydrocarbons. Sir, just wanted to gauge what is the margin profile now for international orders given current commodity prices. And just overall on both domestic and international, is there a potential pinch towards more variable contracts coming in, given the volatility again in commodity prices?

It is largely dictated by the client, because in some of the bids, the condition is fixed price. But there are -- as I told you, 60% of the cases, there are also pass-through variation classes, et cetera, to mitigate the commodity price hikes. The margin profile for EPC businesses have been around 8%, 9%. And International, depending on the cost of resources that we use there, because many of the international markets are also insisting on using the local resources, which are more expensive and maybe on occasions just less productive. So the margins on the international businesses are more like 7% thereabout, whereas in domestic, they're around 9%. So we're still able to manage somewhere around -- in between that, depending on the -- international domestic mix for our EPC business. But the manufacturing business, which feeds into the EPC business, obviously, better margin businesses. And we've been trying to register growth in that business as well, and that's a function of opportunities that we have, both stand-alone supplies as well as feeding into our EPC. So I think with the mix of service business, which is high margin, manufacturing business, which is better margin and EPC, which is on the picking order low margin, but extremely large volume. I think we should be able to maintain this band of blended margin of 10%, 10.5% that we have been reporting.

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

So just one question from my side. Sir, regarding your private sector order book and inquiry pipeline. Could you just throw some light on which sectors are dominating this pipeline? Is it residential, real estate, IT campuses, buildings and factories or industrial facilities, across which sector? And a related question being, since you mentioned that you expect the private corporate balance sheet to delever over the course of next 2 to 3 years, what is the typical lag between a private CapEx inquiry coming in and order finalization? Basically, I'm trying to gauge what -- when would we get the earliest indication of a broad large-scale manufacturing CapEx revival in the country? That's it from my side.

Let me answer the second question first. First, I'll refresh my mind on what the question was. It is long question. As far as the cycle for industrial orders, they're far shorter, because it's very critical for them that the time to market is crashed. And hence, typically, we find 18, 24 months cycle for many of these industrial orders. So the time when an opportunity to scale up market presence and their decision to go ahead and award is far lower as compared to a scenario where public sector or government is involved. I would think a private sector between the in-principle decision and really ordering out, it should be possible in about 4 months's time or thereabout. But as in government, it can be anywhere between 6 and 9 months' time. What is the first question?

Basically, in your current private order book and inquiry pipeline, which sectors are dominating? Is it a residential real estate, IT campuses or industrial CapEx, if industrial then which sector, cement, steel, food and beverages, pharma? Like heavy industries versus light industries?

Pretty spread. It's pretty spread. There are some opportunities for select apartment, residential buildings. There are opportunities for data centers. There are opportunities for logistics box. We've not yet seen the textile park that the minister announced in February, and there are opportunities for brownfield expansion of some of the capacity. So I think it is outside of water and power transmission and heavy cement, which are large infra projects. There are scattered opportunities. I think it's very specific to a project. We can't say residential projects are out. It's never the case. I think they are still -- we have launched in the last quarter, a residential project in Ghatkopar. So I think it's very project-specific opportunity. So I think given our size of operations and the breadth of operations, we find fairly uniform and scattered opportunities.

Okay. And has the inquiry pipeline been going up, especially after the announcement of PLI schemes and related incentives? Do you see any material pick up there in inquiries?

I think specific to PLI, but the sentiment of the country changed from post Diwali FY '20. People were testing to get back to action. So to that extent, I think the inquiries, the bidding that we did, et cetera, is reflective of that sentiment. The sentiment has received a setback in April. I think the number of deaths that have happened in the country has been disturbing. So it is fair to say that sentiment has got disturbed. But we hope that sooner than later, we get out of this difficult situation. But the country has taken a very little time to bounce back in terms of mood change. And I think that's a positive for me. And if the country can just afford to target the difficult period that has gone by and focus on what needs to be done ahead, and they continue to sustain that as what we saw last year, I think we should be able to see revival.

Ladies and gentlemen, due to time constraint, that was the last question. I now hand the conference over to Mr. P. Ramakrishnan for closing comments.

Thank you, Margaret, and thanks to all of you for participating in this call. Stay safe and wishing you all the best. Thank you.

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