L&T – Bluechip, Value play, Digital giant in making

a) Q1 FY25 results: The company’s Q1 FY25 revenues stood at Rs 55,100 crores, up 15% YoY, whereas EBITDA stood at 5,620 crores, up 15% YoY. EBITDA margins stood at 10.2%, flat YoY. PAT stood at Rs 2,800 crores, up 12% YoY. The company’s TTM ROE stood at 14.7% versus 12.8% YoY, partially due to the buyback. Other income was lower due to lower investments pertaining to the share buyback.

P&M EBITDA margins stood at 7.6% versus 7.4% YoY. International revenues constituted 48% of the total revenues in Q1 FY25 (versus 40% YoY). The revenues for the P&M segment were up 18% YoY in Q1 FY25. The company’s CFO stood at negative Rs 500 crores versus negative Rs 990 crores YoY. This is majorly due to the buildup in working capital. Net debt/equity ratio stood at 0.67 versus 0.64 QoQ.

B) Order book status: The company’s order inflows stood at Rs 70,900 crores in Q1 FY25, up 8% YoY aided by strong momentum in the Middle East. The company’s orderbook stood at Rs 4,90,900 crores versus 4,12,600 crores in Q1 FY24, up 19% YoY (and 3% QoQ). 90% of the total order book comes from infrastructure and energy. Slow moving orders are less than 1% of the total order book.

International orders comprised 46% of the total order inflow during the quarter. Of the international order book(38% of the total order book), 92% are from the Middle East, 1% from Africa, and the remaining 7% from Southeast Asia. Of the domestic order book, 14% orders are from the Central Government, 28% are from the state government, 37% are from public sector enterprises, and 21% are from the private sector.

C) Segmental results: Following are the detailed segmental results:

1. Infrastructure Project Segment (48.8% of revenues):

a) Segmental revenues stood at Rs 26,908 crores, up 22% YoY. EBITDA margins stood at 5.8% versus 5.1% YoY due to cost savings.

B) Order inflows during the quarter stood at Rs 40,053 crore, flat YoY. International orders constituted 49% of the total order inflow during the quarter.

2. Energy Projects Segment (15.41% of revenues):

a) Segmental revenues stood at Rs 8,495 crores, up 27% YoY aided by ramp-up in international projects in the hydrocarbon business. EBITDA margins stood at 8.7% versus 9.1% YoY. However, margins here would be increasing going forward. Hydrocarbon margins were affected due to stage of execution.

B) Order inflows during the quarter stood at Rs 8,792 crores, up 21% YoY. International orders constituted 22% of the total order inflow during the quarter.

C) With regards to nuclear power projects, the company has full scale capability in this segment having worked with the NPCIL across most of their nuclear power plant installations across the country.

3. Hi-Tech Manufacturing Segment (3.34% of revenues):

a) Segmental revenues stood at Rs 1,845 crores, up 4% YoY. EBITDA margins stood at 17.4% versus 16.8% YoY.

B) Order inflows during the quarter stood at Rs 3,677 crores, up 100%+ YoY with a receipt of a high value order. Exports constituted 8% of the total order inflows.

4. IT & Technology Services Segment (20.8% of revenues):

a) Segmental revenues stood at Rs 11,505 crores, up 6% YoY due to subdued global macro-outlook which impacted discretionary spend. The EBITDA margin for the segment stood at 20% versus 20.6% YoY.

B) The share of this segment in consolidated revenues and operating profit in FY24 stood at 20% and 34% respectively. This segment is a high-margin and less capital-intensive business than the EPC segment, resulting in higher ROCE.

5. Others segment (2.5% of revenues):

a) The others segment comprises of (a) Realty (b) Industrial Valves (c) Construction Equipment & Mining Machinery and (d) Rubber Processing Machinery.

B) Segmental revenues stood at Rs 1,375 crores, a de-growth of 37% YoY due to lower handover of residential units in the realty business. EBITDA margins stood at 23.4% versus 18.6% YoY.

D) Outlook: The following is the outlook provided by the management:

1. To enhance its presence in the semiconductor sector, the company has recently entered into a share purchase agreement with SiliConch Systems, a Bengaluru based chip design company.

2. With the change of government in the UK, and a hung parliament in France, the concern about the European economic recovery remains.

3. Countries in the Middle East remain focused on investments in Oil & Gas Infrastructure, Industrialization and Energy Transition.

4. The company has a total prospect pipeline of Rs 9.07 trillion for the remaining nine months of FY25 versus 12 trillion QoQ. This sharp drop is due to the decrease in the hydrocarbons prospect pipeline and some orders that the company did not secure. However, the management has maintained its 10% order inflow guidance as previously stated. A 22-23% hit rate would help meet the order inflow guidance.

5. The company is pursuing EPC opportunities in the Middle East in the oil to chemicals space where investments would be made by the clients.

6. The company has an order book of Rs 5,000 crores in the thermal power business which it will execute, but it will get repurposed to gas-based plants over a period of time. Also, the company has ventured into the offshore wind business and secured the first order. With respect to the green hydrogen, the company will bid for the IOCL tender through its JV with IOCL only.

7. The management aims to maintain a slight improvement in the margin momentum. It has given 8.2% P&M margin guidance for FY25.

8. Over the next 3 years, the bridge from 15% to 18% ROE will be filled through:

-1% from breakeven in the Hyderabad Metro which is currently making losses

-1% from improving margins in the P&M segment

-1% on account of higher payout to shareholders (will now have to evaluate buyback)

9. With regards to the Hyderabad Metro, Rs 2,100 crores are yet to be received from the government.

10. On domestic solar EPC, the company is less aggressive on winning the bids as project size in international geographies is larger. The company is getting traction domestically in the pumped storage project space.

11. With regards to an uptick in domestic revenues, H2 will make up for the lion’s share.

12. Capex for the year would be around Rs 4,000 crores. As of FY24, the company had cash and cash equivalents of Rs 33,200 crores excluding financial services business. And as per CRISIL, the company will earn net cash of Rs 10,000 crores in FY25

E) Key risks: Here are some of the risks that the company faces:

1. All international projects are fixed-price contracts. Volatility in input prices or delays in execution could hurt margins.

2. Losses in the Hyderabad metro remain a key monitorable.