R Shankar Raman, Whole-Time Director & CFO of L&T, states that the company’s strategy is to focus on asset-light, high-return areas of operations. This allows the excess cash generated to be returned to shareholders. One way of doing this is through dividends, which are provided annually. Another method is through buybacks, although these occur less frequently. When there are sufficient cash reserves, L&T will opt for buybacks along with a healthy dividend rate.
The biggest advantage L&T has at the start of the year is a robust order book worth nearly Rs 4 lakh crore. This requires the company to expedite execution, and the favorable weather conditions in the April-June period aid in completing projects efficiently. Additionally, most of these projects are overseen by international financing bodies, multilateral agencies, or are government priority projects. This level of oversight and support has been crucial in moving forward, especially as the effects of the Covid pandemic gradually fade away. Revenue growth has been driven by the mobilization of resources in various project sites, leading to increased EBITDA. However, there is still room for improvement in terms of profitability, particularly in light of inflationary effects. Nevertheless, L&T expects a better year in 2024-2025.
The completion of legacy projects and the trajectory of margins depend on the order mix and inflationary factors. Out of the Rs 4 lakh crore order book for the year, nearly Rs 2 lakh crore worth of orders were secured in FY23. These projects were awarded during a time of high inflation, making it challenging to predict cost lines accurately. As a result, the impacts of cost inflation have been observed in the previous two quarters and are expected to continue for the next two quarters. However, L&T anticipates that the mix of orders executed in the last quarter of the current year and throughout the following year will provide better-priced contracts, leading to improved margins.
Hydrocarbon projects, especially those won overseas, serve as the key growth driver for L&T. These projects tend to be larger in scope and size, allowing the company to leverage a global supply chain and benefit from economies of scale. Margins for hydrocarbon projects are expected to remain stable around the reported 9.1% in the first quarter of the year. In heavy engineering, which supplies custom-made equipment to the heavy hydrocarbon and nuclear industries, manufacturing operations offer better margin profiles due to high entry barriers and extensive experience in process and engineering technologies. It is anticipated that the mid-teens margins in heavy engineering will be sustained.
L&T’s mammoth Rs 10,000-crore buyback program is part of its five-year strategy plan, Lakshya 26, aimed at achieving a return on equity (ROE) of approximately 18% by FY26. The company aims to generate consistent cash flows through winning orders and executing projects profitably. With low debt levels and a cash-generating business model, L&T intends to invest selectively in new areas such as LNG transition and hydrogen-related businesses. Additionally, the company plans to divest from underperforming businesses, such as concession assets, to ensure better returns for shareholders. Overall, L&T’s strategy focuses on asset-light, high-return operations, with excess cash being returned to shareholders.