Larsen & Toubro Ltd (LT) Q4 FY23 Earnings Concall Transcript

Larsen & Toubro Ltd (NSE:LT) Q4 FY23 Earnings Concall dated May. 10, 2023.

Corporate Participants:

P. Ramakrishnan — Head, Investor Relations

R. Shankar Raman — Whole-time Director & Chief Financial Officer

Analysts:

Mohit Kumar — ICICI Securities — Analyst

Ashish Shah — JM Financial — Analyst

Renu Baid — IIFL Securities — Analyst

Deepika Mundra — J.P. Morgan — Analyst

Aditya Bhartia — Investec — Analyst

Sumit Kishore — Axis Capital — Analyst

Pulkit Patni — Goldman Sachs — Analyst

Aditya Mongia — Kotak Securities — Analyst

Deepak Krishnan — Macquarie Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Larsen & Toubro Limited Q4 FY ’23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. P. Ramakrishnan. Thank you and over to you, sir.

P. Ramakrishnan — Head, Investor Relations

Thank you, Faizan [Phonetic] Good evening, ladies and gentlemen. A very warm welcome to all of you into the Q4 and FY ’23 Earnings Call of Larsen & Toubro Limited. We will have with us on the call today our Whole-Time Director and Group Chief Financial Officer, Mr. Shankar Raman. The earnings presentation was uploaded to the stock exchange at our website around 6:00 p.m. Hope you have had a chance to look at the numbers and the presentation content as well. As per usual practice, instead of going through the entire presentation, I will take you through the key highlights for the quarter in the next 30 minutes or so. And post which, myself and Mr. Shankar Raman will take the Q&A.

Before I start, a brief disclaimer. The presentation which we have uploaded on the stock exchange and our website today, including the discussions that we will have in this call, contains or may contain certain forward-looking statements concerning L&T Group’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. During Q4 FY ’23, the Indian economy continued to display a surprising resilience despite the continuing geopolitical uncertainties globally. Most of the high-frequency economic indicators are continuing to exhibit growth momentum. PMIs and industrial activity, power demand, credit growth, investment indicators, mobility indicators, passenger and cargo traffic data, etc. are all pointing towards a stable macroeconomic environment. However, the discretionary consumption spends have continued to remain a bit of lackluster.

The tax collections for the government have continued to remain strong and the balance sheets of the banks as well as private corporates are healthier. Clearly, most of the Indian macro indicators, be it growth, current account, fiscal deficit, as well as inflation are relatively better, vis-a-vis other countries in the world. Within GCC, our — one of our primary geographies besides India we also see many countries building their non-oil economy by investing in areas like water green energy and at the same time continuing to ramp up their spend on oil and gas investments. These are definitely interesting times where despite the continuing global turmoil both India and GCC remained relatively stable.

Before I get into the details of the financial performance parameters, I would like to share a few important milestones and highlights for the year. For the first time ever, our group order Inflows have for the year FY ’23 has crossed INR2 trillion. Secondly, our order book at around INR4 trillion is obviously at a record high. Our group revenues for the year FY ’23 at INR1.83 trillion has registered a growth of 17% on Y-on-Y basis, once again a five-year high. We have reported NWC to revenue, this excludes financial services segment, the NWC to revenue at 16.1% as on March ’23, is again the best reported in the last five financial years. Finally, our recurring PAT for the year has crossed the INR100 billion mark. Again, an important milestone for our group.

A few other important highlights for the year are we successfully concluded the merger of L&T Infotech and Mindtree in Q3 FY ’23. The combined entity, which is LTIMindtree, with an annualized revenue currently at $4 billion poses with the capabilities of a Tier 1 company and yet retaining the agility of a next tier form. Similarly, our technology services company, LTTS, also crossed the revenue run rate of $1 billion during the last quarter. Further, LTTS has successfully absorbed the Smart World & Communications business of the parent, the transaction got completed on April 1, 2023. The expertise of Smart World & Communications business in communications envisioning and creating smart and safe cities, power in cyber security services, and 5G enterprise solutions offer ideal synergies for LTTS and three out of its six beds they are placing in the future which are electrical, autonomous, and connected vehicles, 5G, medical technologies, digital products, and artificial intelligence, digital manufacturing and sustainability.

During the year, the commission — the company commissioned pilot green hydrogen plant at its Hazira campus, marking its entry into the green hydrogen business. The pilot plant produces 45 kgs of high-purity green hydrogen daily. Additionally, the company has entered into a technology license agreement with McPhy Energy, France, for manufacture of pressurized alkaline electrolyzers. The company has also entered into an MOU to develop floating green ammonia projects for industrial scale applications with the Norway based H2 carrier.

With the conclusion of the sale of the mutual fund business and a phased reduction of the wholesale loan assets book, L&T Finance, a listed subsidiary, will also transform into a full-scale retail-oriented digitally-enabled business. The realty business of the group in addition to development and monetization of existing land banks will continue to pursue growth in residential and commercial through multiple formats. During the year, the company entered into an agreement with CapitaLand India for developing 6 million square feet of prime office space in Mumbai, Chennai, and Bengaluru. Finally, the IDPL divestment was also announced during Q3 FY ’23. The transaction closure, however, is subject to regulatory approvals and should get concluded in the next one or two quarters.

I will now cover the various financial performance parameters for Q4 FY ’23. Our group order inflows for Q4 FY ’23 at INR761 billion registered a Y-on-Y growth of 3%. Within that, our Projects and Manufacturing business secured order inflows of INR611 billion for Q4, around the same levels as that of the Q4 of the previous year. Our Q4 order inflows in the Projects and Manufacturing portfolio are mainly from infrastructure, hydrocarbon, and defense segments. During the current quarter, our share of international orders in the Projects and Manufacturing portfolio is at 43% vis-a-vis 39% in Q4 of last year. Our share of private orders within the Projects and Manufacturing portfolio is at 18% for Q4 FY ’23 vis-a-vis 22% in the corresponding quarter of the previous year.

Coming to FY ’23 as a full year, our group order inflows at INR2,305 billion has registered a strong growth of 19% over the previous year. We had given a guidance — in this particular parameter, we had given a guidance of 12% to 15% at the start of the year and actuals has been higher of 19%. Within this total order inflow, our Projects and Manufacturing businesses have secured orders of INR1,722 billion for the year, growing by 19% on a Y-on-Y basis. The share of private orders for FY ’23 in this portfolio, that is the Projects and Manufacturing portfolio, is at 27% vis-a-vis 22% in the previous year. And the share of international orders is at 28% as against 37% in the previous year. The year witnessed booking of some noteworthy orders in domestic irrigation projects and wastewater project in the water and effluent treatment business, project in public spaces business in the Buildings and Factories vertical, a few orders in the Hydel and Tunnel business, including a lift irrigation project, and a strategic order in the heavy civil infrastructure business. Apart from this, a couple of orders in ferrous metal space, some select large orders in the defense business, and a large order in the onshore vertical and multiple orders in the offshore vertical of the Hydrocarbon Engineering business were all secured.

Moving on to be prospects pipeline for FY ’24. We have a total prospects pipeline of INR9.73 trillion for FY ’24 as against INR8.53 trillion that we had announced at the start of FY ’23. This by itself represents an increase in the prospects of almost 14%. The broad breakup of the overall prospects pipeline that I just now mentioned at INR9.73 trillion, infrastructure comprises INR6.5 trillion, hydrocarbon at INR2.44 trillion, power at INR0.5 trillion, and hi-tech manufacturing at INR0.29 trillion.

Moving on to order book. Our order book is at INR3.99 trillion as on March ’23. As our projects and manufacturing is largely India-centric, 72% of our order book is domestic and 28% is outside India. Of the international order book of INR1.11 trillion, around 87% is from the Middle East countries, 4% is from Africa, and the remaining 9% from various countries including Southeast Asia. As is evident from the statistic GCC capex for both infrastructure and hydrocarbon sectors is on an upswing post the recovery in oil prices. The breakdown of the domestic order book of INR2.88 trillion, which is 72% of our order book, the breakup is as follows. The share of central government orders 14%, state government 30%, public sector units or state-owned enterprises at 36%, and private sector at 20%. Around 22% of our total order book of INR3.99 trillion is funded by bilateral and multilateral funding agencies. Around 89% of our order book is from infrastructure and energy. You may refer to the presentation slides for further details. During Q4 FY ’23 and FY ’23, we have deleted orders of INR53 billion and INR103 billion, respectively, from the order book. As of March ’23, our slow-moving orders in the order book is around 1%.

Coming to revenues. Our group revenues for Q4 FY ’23 at INR583 billion registered a Y-on-Y growth of 10%. International revenues constituted 39% of the revenues during the quarter. The IT and TS portfolio continued to report an industry-leading growth in Q4 as well. In the Projects and Manufacturing businesses, our revenues for Q4 FY ’23 were at INR433 billion, registering a Y-on-Y growth of 8%. For the full year, we reported group revenues of INR1.83 trillion, a growth of 17% largely achieved on the back of a pickup in the execution momentum in the Projects and Manufacturing businesses, and a healthy growth in the IT and Technology Services business. For revenues, if you may recall, we had given — indicated a guidance of 12% to 15% growth at the beginning of the year.

Moving on to EBITDA margin. Our group-level EBITDA margin without other income for Q4 FY ’23 is 11.7%, a drop of 60 basis points over Q4 of FY ’22. This drop of 60 basis points is mainly due to cost pressures in the projects part of the portfolio. For FY ’23, this drop is 30 basis points, that is from 11.6% in FY ’22 to 11.3% in the current year FY ’23. The detailed breakup of the EBITDA margin business-wise is also given in the annexure earnings presentation. You would have noticed that EBITDA margin in the Projects and Manufacturing business for Q4 FY ’23 is at 9.2% vis-a-vis 10.3% in Q4 FY ’22, and for FY ’23 as a whole is at 8.6% vis-a-vis 9.3% in FY ’22. Against a margin guidance of 9.5% that we provided at the start of the year, we have fallen short by 90 basis points, which is as I said, largely attributed to cost pressures in the EPC projects part of the portfolio. I will cover the details when I talk about the performance of each of the segments.

Our recurring PAT for Q3 FY ’23 at INR39.9 billion is up 10% over Q4 of last year, largely in line with the revenue growth during the quarter. Similarly, our recurring PAT for the year at INR103.7 billion is up 21% over FY ’22. The group performance P&L construct along with the reasons for major variances under the respective function heads is provided in the earnings presentation. You may kindly go through the same for further details.

Coming to working capital. Our NWC-to-sales ratio has improved from 19.7% in March ’22 to 16.1% in March ’23. We have done substantially better vis-a-vis the guidance of 20% to 22% that we gave at the start of the year. Further, the GWC-to-revenues for FY ’23 has dropped sharply to 62.3% as against the GWC-to-revenue of FY ’22 at 73.4%. Our group-level collections excluding the financial services segment for Q4 FY ’23 is INR539 billion vis-a-vis INR430 billion in Q4 FY ’22. For FY ’23, our group-level collections excluding financial services segment is INR1.7 trillion vis-a-vis INR1.36 trillion in FY ’22, representing an increase of 25%. The improvement in gross working capital is also reflecting in the net working capital. Receipt of customer advances towards the orders received during the year also helped the extent of net working capital drop. Our gross debt-to-equity ratio as of — for FY ’23, the close of FY ’23, is 1.14 as against 1.29 at the end of FY ’22. Finally, our return-on-equity for FY ’23 is 12.2% vis-a-vis 11% for FY ’22, an improvement of almost 120 basis points.

I will now comment on the performance of each of the business segment before we give our final comments on the outlook for the medium term. First would be the Infrastructure segment. Coming to order inflows, this segment secured orders of INR412 billion for Q4 FY ’23, registering a de-growth of 9%. That is primarily due to high base of the corresponding quarter of the previous year. However, full-year order inflows in this segment were at INR1,171 billion, reporting a substantial growth of 25% over FY ’22 on receipt of multiple large-value orders across all the sub-segments under this particular business. During the current year, Buildings and Factories benefited from receipt of some prestigious orders in the public space business. The Heavy Civil Infrastructure registered growth on the receipt of a mega infrastructure order. And the Water and Effluent Treatment business also received numerous orders for irrigation and wastewater treatment. The Minerals and Metals business performed well with the receipt of multiple ferrous orders from a private client. For two years in a row, the Power Transmission business has continued to benefit from the gigawatt scale renewable opportunities from the GCC region. The decline in order inflow in transportation infrastructure for the year is mainly due to deferral of targeted prospects.

Coming to order prospects for this infra segment. For FY ’24, it aggregates to around INR6.5 trillion, vis-a-vis INR5.72 trillion as of last year. The breakup of domestic in the total order prospects of INR6.5 trillion, the share of domestic is INR5.19 trillion, and the balance international prospects of INR1.31 trillion. The subsegment breakup of total order prospects in infrastructure business is as follows: Heavy Civil Infra 21%, Water and Effluent Treatment at 22%, Transportation Infrastructure at 19%, Power Transmission and Distribution at 18%, Buildings and Factories 13%, and Minerals and Metals at 6%. The order book in this segment is INR2.845 trillion as of March ’23. The book bill for infra is around three years. The Q4 revenues at INR312 billion registered a growth of 5% over the comparable quarter of the previous year, whereas FY ’23 revenues at INR867 billion registered a strong growth of 20%, largely aided by the ramp-up of execution of large orders in the portfolio. As a philosophy, we always step up execution when customer collections are flowing at a healthy pace, to essentially strike a healthy balance between P&L and the balance sheet. Our EBITDA margin in this segment for Q4 FY ’23 at 7.5% registers a de-growth of 170 basis points over the corresponding quarter of the previous year, whereas the full year EBITDA margin at 7% registers decline of 120 basis points. Margins for the quarter and the year remained subdued due to job mix of largely government, public sector tender projects under execution, input price pressures, logistics constraints, cost overruns in certain jobs pending delay in the customer claim settlements. Client claims will be pursued under the terms of the respective contracts, the settlement of which will happen over time.

Moving on to the next segment, which is Energy Projects, which comprises of hydrocarbon and power. Receipt of multiple domestic and international orders in the hydrocarbon business during the year improves the order book, whereas deferral of orders continued in thermal power. We have a strong order prospect pipeline of INR2.94 trillion for this energy segment in FY ’24, comprising of hydrocarbon prospects of INR2.44 trillion and power prospects of INR0.50 trillion. The order book for this energy segment is at INR724 billion as on March ’23 with the hydrocarbon engineering order book at INR670 billion and power at INR54 billion. The book bill for this segment is around 20 months. The Q4 and FY revenue growth of 18% and 6%, respectively, is largely led by the execution momentum in hydrocarbon, whereas lower revenues in power is a function of a depleted order book. The improvement in EBITDA margin in this segment for the quarter and full year is largely a function of execution cost savings in both the segments. Further favorable customer claims settlement in hydrocarbon in Q4 FY ’23 also aided the improvement.

We will now more to Hi-tech Manufacturing segment, which comprises of Heavy Engineering and the Defense Engineering businesses. In this quarter, order inflow growth in Defense Engineering is driven by the government’s thrust to towards indigenization whereas Heavy Engineering ordering was impacted due to deferrals. For the full year though, both Defense and Heavy Engineering have benefited from multiple order wins. We have an order prospect pipeline of INR252 billion for this segment in FY ’23. The share of defense against this pipeline is around 78%. The order book for this segment is INR262 billion as on March ’23. Revenues for Q4 and full year for this segment registered a growth of 21% and 10% respectively, largely attributed to higher progress in the refinery business of Heavy Engineering and execution ramp-up of select projects in the Defense Engineering business. Margins variance for the quarter vis-a-vis corresponding quarter of the previous year is largely a function of the job mix in this segment, whereas full-year margin variance had some element of execution delays arising out of supply chain issues.

While I’m on this segment, I would like to mention once more that the Defense Engineering business of Larsen & Toubro does not manufacture any explosives nor ammunitions of any kind, including cluster ammunitions or anti-personnel landmines or nuclear weapons or components for such munitions. The business also does not customize any delivery systems for such munitions.

Moving on to the next segment, Information Technology and Technology Services. As you’re all aware, the merger of LTI and Mindtree merger got concluded on November 15, 2022. The merged entity is uniquely positioned to scale up by competing for large deals and will benefit from cost and revenue synergies on upselling, cross-selling, and stitching services together. The revenues for this segment for the quarter at INR106 billion and the full year at INR407 billion registers a growth of 21% and 26%, respectively, over the corresponding period of the previous year, largely reflective of the continuing growth momentum in the sector with the surge in demand for technology-focused offerings. The margin decline in the segment for the quarter is a function of higher staff cost, whereas for the full year, the margin was impacted to a combination of higher employee cost as well as onetime integration expenses due to the merger of the two companies. I will not delve too much on this segment as both the companies in this segment are listed entities and the detailed fact sheets are already available in the public domain.

We move on to the Financial Services segment. Here again, L&T Finance Holdings is listed and the detailed results and the fact sheet are already available. The highlights for Q4 FY ’23 for Financial Services segment were improved net interest margin and fees, lower credit cost, better asset quality, and rundown of the wholesale and expansion of the retail loan book. In fact, as on March ’23, the share of retail in the overall book at INR80,000 crores is at 75%, 75% of INR80,000 crores. The strategic deliverables in this business revolve around portfolio reorganization, strong asset quality, and improvement in ROE. This business endeavors to be a top-class digitally-enabled retail finance company moving from a product-focus to a customer-focus approach. Finally, to conclude, sufficient growth capital is available in L&T Finance balance sheet.

Moving onto Development Projects segment. This segment currently includes the Power Development business comprising of the thermal power plant, Nabha Power, Uttaranchal Hydropower up to the date of its divestment previous year, August 2021, and Hyderabad Metro. Let me mention here that profit consolidation of L&T IDPL at a PAT level has been discontinued from Q4 FY ’23 post signing of the definitive agreement for sale of our entire stake in the company. The investment in this JV is now classified as held for sale. The majority of revenues in the Development Projects segment is contributed by Nabha Power, improved ridership in Hyderabad Metro and higher PLF in Nabha drive revenue growth for this segment. To give you some statistics on Hyderabad Metro, the average ridership improved from 1,99,000 passengers a day in Q4 FY ’22 to 4,08,000 passengers per day in Q4 FY ’23. Our average ridership in Q3 FY ’23 was 3,94,000 passengers a day. Also average ridership for Hyderabad Metro in FY ’23, that is the whole of the year, was at 3,61,000 as compared to 1,55,000 in FY ’22. The higher segment margin in Q4 FY ’23 is primarily due to consolidation of Nabha profits led by increase in the benchmark valuation. The metro at a PAT level, we have consolidated a loss of INR13.21 billion in FY ’23, vis-a-vis a loss of INR17.51 billion in FY ’22. The interest cost in the Metro SPV has reduced from INR14.77 billion in FY ’22 to INR12.73 billion in FY ’23, largely reflective of the benefits of refinancing which got concluded in the previous year.

Moving on to other segment. This segment comprises realty, industrial valves, Smart World & Communications, construction equipment and mining machinery, and rubber processing machinery. The Q4 and FY ’23 growth in this segment is mainly in realty, rubber processing machinery, as well as construction equipment and mining machinery. The Q4 and FY ’23 margins of this segment is in line with the corresponding period of the previous year.

Before I conclude on to the environment outlook, I want to draw your attention to two new slides which we have included in the annexures to the earnings presentation. The first slide is how return ratios have improved in the Projects and Manufacturing portfolio over the last five years. If you glance through the numbers, you will realize that a combination of revenue growth and reduced capital intensity in this Projects and Manufacturing portfolio has offset the margin slide and actually resulted in improved return ratios over time. As I said this at the cost of maybe I’m sounding defensive margin, I would like to mention that the delays and disputes on additional claims from clients has created in some sort of a timing mismatch in the books, consequently, impacting margins in the shorter term. Hopefully, the benefits will accrue to P&L as and when the claims get processed over time.

There is one more slide as part of the annexures to the earnings presentation, which explains the journey of return ratios to group level. In this slide, we have listed out three action points for ourselves as part of our Lakshya 2026 strat plan to improve the returns to our shareholders. And if you see that, it covers the portfolio — the emphasis is on the portfolio retailization of financial services, the phased exit or reducing exposure from our development projects portfolio, and a higher cash return to shareholders over the period.

Coming to the last part of my presentation, which is the outlook. India’s economic growth continues to display encouraging resilience despite the continuing global chaos. Prudent fiscal and monetary policy management from the government and RBI, respectively, has resulted in the partial decoupling of India growth story with the rest of the world. The government’s push for growth through larger infrastructure spend is clearly evident from the enhanced budgetary allocations for FY ’23, ’24. PLA incentives improved business confidence and buy and demand conditions will culminate into revival of private capex in the medium term. Going forward, improved tax collections for the government will support its capex-led growth aspiration. Further bank balance sheets are healthy, providing opportunities to lend funds to creditworthy products. With the government’s enhanced thrust towards manufacturing exports, the country’s goods trade deficit should narrow over a period of time. The country is committed to net zero goals and both the government and the private sector are committed to investments around energy transition. Amidst these various moving parts, the silver lining is that India would come — continue to remain one of the fastest-growing economies in the world.

The last two years has seen the global economy striving to deal with overlapping crisis, the latest being the liquidity troubles after a series of global bank crisis. While the inflows have been contained, these uncertainties continue to undermine the confidence among consumers and businesses to spend, possibly impacting global growth. Government and central banks across the world are attempting to strike a balance between containing cost plus inflation and pursuing demand-lend growth. A combination of China’s reopening, a significant easing of the natural gas cases in Europe, and a resilient U.S. consumer confidence should help the global economy tide over the current uncertainty overhang. With OPEC and partner countries announcing production cuts, oil prices are likely to remain firm at current levels, aiding the GCC nations to pursue their capex plan in oil, infrastructure, green energy, and other industrial sectors.

In this backdrop, the company will focus with cautious optimism on large — pursuing large project wins, timely execution of its large orderbook, growth of its services portfolio in the stated glide path, and preservation of liquidity and optimum use of capital and other resources. The company is optimistic about its growth aspirations in the medium term despite this uncertain macro environment and is committed to creation of sustainable value for all of its stakeholders.

Finally, let me comment on our guidance for the next year before we take Q&A. On order inflows, this is at a consolidated level, that is at a consolidated group level, our guidance is around 10% to 12% band for FY ’24. On consolidated revenues, we are providing a guidance of around 12% to 15% band in FY ’24. On margins, with respect to our Projects and Manufacturing business, we closed the year FY ’23 at 8.6%. It is our endeavor to improve the margins of around 40 basis points to 50 basis points, maybe in and around 9% for FY ’24. Having said this, the margin trajectory should be showing a good improvement in the later part of FY ’24. In terms of the projects that will come and cross the margin recognition thresholds, we see the later part to be a more profitable second half than the first half. On working capital, we are giving a guidance range between — this is, again, working capital at a group level, the guidance would be between 16% to 18% for FY ’24.

On the sustainability front, the parameters for FY ’23 are undergoing audit currently. We will be presenting you the same when we come with our Q1 FY ’24 earnings presentation.

Thank you, ladies and gentlemen, for the patient hearing. We will now open the floor for questions. Both, myself and Mr. Shankar Raman, will be taking the questions. Requesting the participants to restrict their questions around the broader aspects of performance and strategy in order to make the best use of the available time. Any bookkeeping questions can be taken up with the Investor Relations team later on.

Over to you, Faizan.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Mohit Kumar from ICICI Securities. Please, go ahead.

Mohit Kumar — ICICI Securities — Analyst

Yeah. Good evening, sir, and congratulations on a very, very strong order inflow. However, sir, the EBITDA margin has been slightly on the lower side. My first question is, the EBITDA margin for last three years for the core segment is 10.3%, 9.3%, and 8.6%. It has been continuously been declining. As a result, EBITDA growth, if I look for the last three years for the core business, is around 7% to 8%. Do you expect margins to improve in FY ’24 materially and some of losses which you have incurred in FY ’23 are less in the COVID period will come back in FY ’24 and will improve slightly on the highest side of 50 bps — 40 bps, 50 bps looked to the lower side? That’s the first question.

R. Shankar Raman — Whole-time Director & Chief Financial Officer

Mohit, Shankar Raman here. Good evening.

Mohit Kumar — ICICI Securities — Analyst

Good evening, sir.

R. Shankar Raman — Whole-time Director & Chief Financial Officer

You have chosen a very interesting three-year period to your margin profiling, okay? And this has been the most challenging three-year period for EPC companies as you will know. The margins that we have reported now largely reflects the cost of inputs that have gone into the execution. And to a limited extent, we were able to sort of fine-tune the time that is available at our hand to complete the project, waiting for the prices to cool down. But it was not possible across the length and bread of the project business that we run. So, we had to actually go ahead, complete the project, make sure that we don’t get into the LD zone, and complete our obligations. Now, as you know in project business, the margins are not linear, because, A, there are milestones, and, B, there are various gates for margin recognition and contingencies, cost contingencies, and C, is finally at the end of the project, there is always a negotiation around any of the scope creep, time cost overrun, etc. So, it does take the project completion plus 12 months to actually get the final outcome of a project. Now while it is true that as the projects are getting more and more complex, competition is increasing. The margins never used to be the same that we used to be because the world is getting far more competitive. So, there is no doubt in my mind that the 10%, 12% margins that we used to comfortably enjoy is not there for some time. I think we need to learn to operate efficiently in a lower-margin band.

Now what can be the compensating levers? One is the complexity of the projects that we can bid for where there is a higher engineering overlay, which will give you some competitive advantage and keep the bar higher. Second is how to ensure the time erosion that happens in project execution improves and to the extent to which we could have rebid arrangements with our entire vendor ecosystem so that the margin erosion is just not confined to the EPC player, but the chain there the cumulative burden but in a more distributed manner. And third, obviously, is I think as we broad-based our presence across geographies, we have to make sure that there is sufficient cushions that are available in the various markets that we operate in. The timing mismatch is part and parcel of our business, unfortunately, because the costs get incurred first and then the negotiations happen for final settlement. Except that, the cost gets accounted in a lumpy manner and the benefits drip in a phased manner. So, you don’t even realize the recovery that happens in this. The sustainable lever that we are operating on and it’s very visible even in FY ’23 is how to reduce the capital intensity. I think we should either run a business where the returns are very — the margins are very high so you can afford to actually be less rigorous on capital allocation.

The other scenario where margins are ending lower because of general competitive environment, economic landscape, etc. and hence get far more efficient in resource deployment. When I talk about resource deployment, it’s just not money but money, men, material, etc. Also the fact that we increasingly are getting to automate our processes, trying to use digital technology in our project-related manufacturing equipment, and also have modular fabrication so that we operate on a batch mode rather than on a sequential mode. Now these are levers that will take some time to seep in into the organization. If we just allow the cost increases to play out, it would have been far sharper fall than what we have managed because of all these compensating levers, which have all got at various degrees of maturity. We do believe in the next couple of years, two things will happen. Hopefully, we’ll perfect this model of getting less resource-intensive and get more cost-competitive and more operationally efficient, reduce the river time, reduce the downtime, etc. And, B, is the backlog that is actually suffering the higher input costs have — will — would have got exhausted by then. According to me, 60% of the backlog that had large cost inflation has got exhausted during the current year. The balance will spread over possibly next year and the following year. But my belief, as Mr. Ramakrishnan was mentioning, the subsequent two quarters will continue to see cost pressures and softer margins. But as the [Indecipherable] turnover, that phase, and cross the hump, then positively the margins will begin to look up. And ’24, ’25, my assessment is we have more accurate reflection of a normalized execution. Sorry for the long answer, but it deserve it.

Mohit Kumar — ICICI Securities — Analyst

Thank you, sir. My second question is, sir, when you look at your green manufacturing portfolio, what are we aiming in FY ’24? What is the capacity we’re looking for electrolyzer? And the related question is that, are we getting more and more inquiries for the EPC for the green hydrogen, green ammonia, or green manufacturing plant?

R. Shankar Raman — Whole-time Director & Chief Financial Officer

We are working on a capacity of 1 gigawatt for electrolyzer. As you know, we have tied up with McPhy, France, for technology licensing. The factory is getting set up now. We do believe by the time this financial year runs out, we would have produced first few electrolyzers. Initially, it would be a product used in India. But we do believe it has potential to be a global product. We should get the technology right. We should get the costing right, etc. So, our sense is that by FY ’24, end of FY ’24, the electrolyzer plant will be up and running, meaning commissioned. We have not exactly chalked out how many units we will produce, etc., because that will be a function of marketing and product development. Insofar as EPC is concerned, I think the world is actually beginning to come to terms with the green hydrogen. It is still not according to me widely implemented. It is widely spoken. I think there is enough pressure on the system for people to get more green in their fuel efficiency and fuel usage, etc. So, this trend will begin to pick up. My own sense is that it’ll take zero to three years for us to see some scaling up happening in this opportunity. At the moment, what we are trying to do is we’re trying to stay relevant to the technology and the developments around. We are having conversation. Maybe if the initial movers in this, for example, groups like Reliance, have announced plans to manufacture, and given our EPC competence and also our electrolyzer manufacturing capability, if we are able to get some initial orders, maybe couple of INR1,000 crores could be the initial orders that we could get in this area. But ’24, ’25 would be a more appropriate time for us to actually size this opportunity, Mohit.

Mohit Kumar — ICICI Securities — Analyst

Understood, sir. Thank you, and best of luck, sir. Thank you.

R. Shankar Raman — Whole-time Director & Chief Financial Officer

All the best.

Operator

Thank you. The next question is from the line of Ashish Shah from JM Financial. Please, go ahead.

Ashish Shah — JM Financial — Analyst

Yeah. Good evening, and thank you for the opportunity. Sir, my question is on the guidance. While of course 12% to 15% revenue growth guidance is a good guidance, but given the fact that we are sitting on a record order book and our working capital cycle is probably at the lowest point in several years, do you think this is a tad conservative and there is a potential to do better? Or, you think given the constraint this is the correct number to look at?

P. Ramakrishnan — Head, Investor Relations

There is event risk at the moment, Ashish. Many states are going for elections. Country will be geared for union election. So far, things have been progressing well because the enablers for project execution have been much better in terms of environment. We have to be a little guarded in the current year. My own sense is it could be a bit of a truncated year, it may not have the full benefit of 12 operating months. I really do not know-how many months in the current year and how many months in the next year will actually get into some kind of a silent period, so to speak, for large moves by the government. And secondly, the finance minister is blessed with a high degree of compliance and willing taxpayers. So, today, I think, the physical conditions look very, very rosy. Now if the allocations change track because of some political priorities, some of these projects can get little slower. Now the — while the apparent implication of this in order inflow is understandable, the operations infrastructure, public space, is always brought with some this of access, clearances, multiple agencies to give progress-enabling approvals, etc. If the bureaucracy slips into some kind of a political prioritization mode, then some of these could get affected. We also have to see the war seems to be escalating, at least the last one week. Whatever normalcy we thought the level of escalation will happen has got completely changed, and it is getting into another pitch of rivalry and attacks and stuff like that. I do not know how much more supply chain disorientation is going to happen. So — and we do — for our project business, do a fair bit of equipment supplies from international markets. So, we want to be a little careful here. This is not to say that there is no upside, for example. In the current year, we said 12% to 15%, but we landed up with about 17%. Our effort would always be to beat margins. But so early in the year, we felt that it’s better to be a little more surefooted than adventurous on the guidance.

Ashish Shah — JM Financial — Analyst

Sure, sir. Got that point. Thank you for that. This last question. On the defense, we have got a pretty good initial for the fourth quarter. I just wanted to get some color on this because there were a couple of — there were a few programs where we were in the front line. There is a cadet training ship, there’s model of bridges, the Vajra gun orders. So, I just wanted to know which of these programs is — has been received and which is yet to be taken in the inflow and also in the pipeline, we’ve again talked about fairly good number in terms of prospects for defense. Any broad color on which programs are we eyeing? That would help, sir. Thank you.

R. Shankar Raman — Whole-time Director & Chief Financial Officer

There multiple programs. Some are land-based army systems and some are naval systems as you know. Now given the confidentiality with which we are bound, on the FY ’23 wins, I’m not able to call out specifically as to which program is moving. But suffice to say, both the naval programs and the land-based programs are on course. I think the government is getting comfortable with private sector participation. Still early days. I don’t think a few orders should make us conclude that it’s going to be a up and running volume. We’ll have to wait and watch. But these are areas where we have capabilities. And so, to the extent at the moment, let me be a little circumspect in calling out. But all the programs that you mentioned are alive. And these are continuing programs. So, none of these programs is actually one-order program. So, our hope is that we will continue to keep receiving some of these orders going forward because the services requires these quite badly.

Ashish Shah — JM Financial — Analyst

Okay, sir. Thank you. Thank you for your responses.

Operator

Thank you. The next question is from the line of Renu Baid from IIFL Securities. Please, go ahead.

Renu Baid — IIFL Securities — Analyst

Yeah. Good evening, sir. My first question is on the cash utilization in the asset divestment. Now with IDPL almost done and hopefully Nabha also closes in fiscal ’24 given that you have readjusted the net realizable value there, how are we looking at the overall cash just of the books for the deleveraging coming in place? And with this reduced networking cycle that we’ve seen because of a structural growth or if a cyclical growth in orders, how are we looking at the overall utilization of these proceeds? Any M&A in pipeline, etc.?

P. Ramakrishnan — Head, Investor Relations

Actually, insofar as M&A is concerned, we have so far been scaling up in the IT services in the core business of engineering, construction, manufacturing. We think we have much of the competencies, better than most available. So, to acquire another company in those core areas, unless it completely changes the competency profile or the threshold for pre-qualification, I don’t think we are thinking in terms of any such major buy. At the moment, the focus is two. One, is to complete the divestments that we are working on. You mentioned about Nabha. As I mentioned to you possibly in one of the earlier meetings, Nabha is a unique asset. It’s a fantastic asset by itself and it is being put to good use in Punjab. The problem with Nabha is that it has been constructed at a cost which is far higher than the cost at which power capacities are available through NCLT proceedings. So, to that extent, I think it suffers from some competitive disadvantage when it comes to being sold out in the market. But having said that, what we have done in Nabha is some very good effort in making sure we are closing all the litigation. Significant litigations have been one and money collected against those litigations in the last year. There are one or two which are still left and we’ll continue to endeavor to get them also resolved. If we keep the plant running as well as we are doing now and take all the litigation-related discounts out of the equation, we might possibly find interested people for a performing asset, because when you buy an asset through the NCLT process, etc., you have to incur a fair bit of expenditure to revamp the plant. Many of these plants have remained shut for long, etc. So, who knows there might be an interested party who could possibly aggregate its non-green capacity. But the fact is we are trying to sell non-green at a time when everybody is talking green. So, there’s going to be a bit of an effort required. At the moment, it is not hurting us in terms of either utilization of the asset or the margin that it is contributing. Whereas if I look at IDPL, you are right. I think we’re almost home. We have to make sure all the various approvals that we need to get, we get in good time and hopefully we’ll close it in the course of this year.

The core businesses are expected to generate good cash. We have worked very hard to make sure that the asset — the capital intensity, resource intensity we have brought it down. Even though we surprised ourselves in getting to 16%, I think it is safer to plan to operate in that 15% to 18% band. And we’ve seen that pattern in the past because generally, the first two quarters would involve a lot of vendor payouts. And thereafter, the customer cash flows get stronger than Q3 and Q4. So, there could be some ratio movements but it will be within this band. If the cash flows are good and the debt servicing, I do not think would require lot of cash because anyway the parent company, if you keep aside the Hyderabad Metro and the Nabha power plant and keep aside the financial services debt, the parent company has pretty low debt, 0.2:1 is the kind of debt-to-equity. So, I don’t think there’s substantial debt to be done. There’ll be some strategic assets that we might have to invest in because of the kind of orders that we’re trying to procure, for example, when we got lot of metro work, especially underground, we had to invest a lot in tunnel boring machines. We hardly used have any. Now we are almost having two dozen now. So, these are expensive equipment. Likewise, dedicated freight corridor program involved a lot of automated track-laying equipment. So, these are large investments. So, we do think about INR3,000 crores to INR4,000 crores worth of assets we might have to invest depending on the type of the projects. I mean, these are actually would be very contingent on the type of projects that we get. But barring this, I do not think there is going to be any significant call on the capital. We have stepped up our dividend, as you’ve been seeing now, it’s almost 40%. In fact, 42%, 43% of profits earned in the stand-alone subsidies being paid. So, there is a move over the last couple of years to increase the dividend. We have spoken along the way, we said in this FY ’26, we’ll also try to do some written-off cash to shareholders by means other than just the dividend payout. We had attempted for buyback in the past and we were actually pushed back by regulations at that point in time. We have time now, in this period, we should be able to — one of the — one of the objectives and that’s covered in one of the slides that we’ve attached this time to the presentation deck, that one of the ways to deal is to enhance the return of cash to shareholders. And that will possibly enable us to keep the cash required to optimal level within the company instead of sitting on extra of cash.

Renu Baid — IIFL Securities — Analyst

Sure. One follow-up question if I can ask. While its credible the way L&T has managed its net working capital and truly industry-leading, but on the operating performance side, sorry to harp again, despite having the diversity of project size and scale, at the end of the day when you have seen commodity uncertainties in supply chain, the operating performance is not very different compared to other midcap EPC means, where do you want to take the names here. So, you know, what are the steps that we are trying to do, so that these issues are addressed? And we already have quite a bit of risk management processes commodity hedging in place, unlike most of the other peers. But where do you think has the gap been because — which could be a reason for this under-performance on the operating front?

P. Ramakrishnan — Head, Investor Relations

See, I think, it’s very difficult to compare L&T, given its history, its maturity, cost structure, etc., to various EPC companies which work in the same area. You would be surprised that companies which existed 10 years ago are no more in the picture. Forget about competing with us. They are just not in the picture. So we find that practices have been very varied. I would not like to join forces to pick holes on the accounting practices and recognition practices, etc. We do think that EPC business is catching the tiger by the tail. You have to ride it and you will have to ride through several cycles. And if you happen to be a company which is 80 years old, it does go through these cycles.

Our own sense is that the kind of derisking that we have achieved between geographies, between the various verticals, etc., provides us requirement to keep investing in many of these areas. As I just mentioned a little while ago, I do not know how many companies would have invested in the kind of equipments that we invested on the back of projects and that’s the reason why projects are moving forward. But all these are costs and the cost will get recovered only if there is consistently large projects that have been given out.

It’s only in the last three years, four years that we have been seeing some amount of consistency in ordering, order placements, the kind of projects, the complexity, etc. I think we are on a cusp of a period where if you continue to see these kind of investments, the wheat will get separated from the chaff. At the moment, we might suffer by comparison, but I think it is more structural rather than efficiency in execution.

Renu Baid — IIFL Securities — Analyst

Got it. Thanks much and all the best, sir.

P. Ramakrishnan — Head, Investor Relations

Thank you.

Operator

Thank you. The next question is from the line of Deepika Mundra from J.P. Morgan. Please go ahead.

Deepika Mundra — J.P. Morgan — Analyst

Good evening, sir, and thank you for taking the question. Sir, if you just think back on the FY ’26 strat plan, in terms of the prospective, which areas do you see are surprising you more positively than what you would have thought? And where do you think a greater push is required either from government or from private sector, which has been missing your expectations?

P. Ramakrishnan — Head, Investor Relations

We are midway, isn’t it, Deepika. I mean, ’26, we still have to cross three more years. I think, so far we have been on course. If I were to plot what we have achieved in FY ’22, what we have achieved in FY ’23, I think we have been by and large on course. What is going to be important, rather than what has surprised us, etc., what is going to be — COVID surprised us. I mean, we never ever anticipated the kind of start to our strat plan. And what has surprised us is our ability to actually stay the course, despite this disruption. I think all credit to the organization that we work, for people actually put their shoulder to the ground and made sure that we are not losing our way.

As far as government is concerned, the tax buoyancy has surprised us, and the confidence that the country has today in not only defending its own domestic policies, but be able to articulate internationally as the way India is a market that others should participate in. Now if we are able to carry this forward, and that’s why I felt that with extraordinary diplomacy and branding that India has done, we are able to carry this forward, we are able to widen the tax coverage, I mean footprint. Instead of 10% of the country paying the entire tax bills, we can able to make it the 12%, 13%, 14%, 15%, if we’re able to improve that and keep focus on investments, which will generate employment, which will generate connectivity.

There is a pattern to the investment on infrastructure, if you see, because it is enabling movement of people, movement of goods, etc., and I do share the central government’s vision that a connected country will lead to overall development and more inclusive development than what has been in the past.

So my sense is that if we are able to keep the political differences that way and be able to pursue regardless of which party actually succeeds in ’24, we’re able to pursue this and do whatever I just mentioned. I think we would surprise ourselves at our potential. Many of us have been — have grown up, thinking that India is a [Technical Issues] growth country. Now in today’s time, it’s not hard to imagine India at double that rate. So, I think, a lot of work needs to be done, but the hope and optimism has gone up. The country has got lot more confident and that is rubbed on us also. We also internally feel confident. But there are lots of battles we’ll have to win.

As I mentioned, I think, we are as we get older and older, we have to make sure that we unlearn and relearn, we have to make sure that the talent that got us here, which is obviously aging talent. We have to make sure the younger talent is willing take this company forward. We have to adapt to new technologies. I think no — no more are we using the same methods to deliver. The clients are getting smarter and demanding. So we have to make sure that we measure up to that as well. So there are enormous challenges ahead, it’s not a easy path. But I think, I guess, that’s what would make the growth story of the company and maybe the country interesting.

Deepika Mundra — J.P. Morgan — Analyst

Thank you, sir. And just a second question, given that we’ve seen consistent commodity, volatility plus supply chain disruptions, do you see that differentiation in contract negotiation with clients today both in domestic and in international markets or do you think some of the bidding practices largely remain same as what you’ve been following so far?

P. Ramakrishnan — Head, Investor Relations

To the discerning, there is a difference, because people have seen us deliver despite COVID. And people have seen us take knock and then hit deliver. So to that extent, I think, to the discerning, there is a difference between what we have done under the — on the face of adversity, otherwise. But if you also look at the other way that typically the public sector units or the government-sponsored projects are done, end of the day it is L1. I think there is some comfort that all these agencies take in having a bid responded to by at least half a dozen people. So, they make the bid in such a way that more and more people can sort of participate.

Despite the directive from the government that the bidding should not be — the bids should not be decided just based on L1 and there should be a quality and cost-based consideration. Somehow the user departments, especially if it is driven by bureaucracy is more comfortable with quantitative costs than qualitative assessments of technical capabilities. So that has not played out as said, we still have to be L1 to make sure that we make the cut. So that has not changed. And because of the need to have more people participating if the thresholds do not go up sufficiently, we will have delayed projects.

See infrastructure, if India wants to be very competitive in its services, manufacturing, products, goods, etc., it has to create infrastructure at a very competitive price. All the inputs that go into infrastructure are anyway generally market driven, so there is nothing that you can do. What you can do is save time. Make sure that the projects are awarded to companies which are able to execute within time. And my own assessment is at least 15% to 20% of the cost of infrastructure in the country, we are paying more just because of either unorganized dis-coordinated approvals and all the related project clearances and the delay, inevitable delay in negotiating after the project is done because [Indecipherable] gets negotiated, quantity gets negotiated, right-of-way and all the utility removal gets negotiated. All of this fall in place and there is always some public interest group which doesn’t like the project.

So, you take we’re not involved in that asset, but if you take even the high-speed rail, it came up to the border of Maharashtra and got stuck. And now slowly packages are being done, but we have lost two years. And instead of the project getting completed, it’s going to take at least three years more than the original. And who is going to pay for that extra time? It’s only you and me as taxpayers and country’s exchequer will pay. So, I think, in this quest of creating competitive infrastructure, it is very, very important that we back companies which have the requisite capabilities and competencies. And that is something that somehow that has not completely changed to our satisfaction at least.

Deepika Mundra — J.P. Morgan — Analyst

Okay. Thank you very much, sir.

Operator

Thank you. The next question is from the line of Aditya Bhartia from Investec. Please go ahead.

Aditya Bhartia — Investec — Analyst

Hi. Good evening, sir. Sir, my question is again on infra margins, wherein the first time we had post the cost overruns on the transportation side, we had spoken about possibility of getting some variation. So just want to know how is our experience been, is it that we are getting variations and the margins that we are seeing are after accounting for those or is it that you’re really seeing that it’s taking much longer to get those negotiations done?

P. Ramakrishnan — Head, Investor Relations

Aditya, we are realizing the hard way that to get these extra credits from the customer is not as easy as originally on would take, because what is the customer’s first priority to get the project completed. And what is our requirement, we can’t go to the negotiation table without the project being completed. So, I think, first and foremost, I’ll have to complete the project. And in the meanwhile, keep filing our interest in whatever negotiation, commercial adjustments that we want to achieve, but this typically happens at the end of the project.

And if it is, let’s say, corporation, like, let’s say, for example, I’m seeing, IOCL, ONGC, etc. They are also worried about the decision — discretionary decision being question in the parliament. So, there often is a process involved to make a conciliation involving a third-party independent person, even assuming it is not a dispute which get referred to arbitration, even a conciliation to close out on the veracity of the claim and validity of the claim, etc. That process is involved.

So it does take time to get all of this done. But the only good part is, if our reputation is intact and we have delivered to plan, then the chances of concentration is far higher. So, to my mind, we don’t normally recognize the claims ahead of time. We book the costs, all right, for projects completed and only on acknowledgment by client either in terms of the accepting the liability or receipt of payment as the margins recognized of that extra claim.

So it comes in the subsequent quarters, it depends on when a project is completed. We can easily take another six months to 12 months after the project is completed, during the defect liability period for all these conversations to happen. So my sense is what we have lost out in ’22 and ’23, possibly will start creeping into our books from ’24, ’25 onwards is my assessment. And it will go in for couple of years. The same couple of ways, it took to hit us. It will take the couple of years to get back.

Deepika Mundra — J.P. Morgan — Analyst

Sure, sir. And what about the past claims in respect of some of the transportation projects? Have you kind of received some money in this pictograph [Phonetic]?

P. Ramakrishnan — Head, Investor Relations

Yes. Some portion has happened. I think, I heard my colleagues talk about, in the context of Hyderabad, when you were saying some claim settlement matter. So these things happen, except that they come in sizes which are actually not material. So they come in and then get submerged in the overall cycle of margins. But settlements are happening. We would like it to happen faster but they are happening.

Aditya Bhartia — Investec — Analyst

Understood, sir. And sir my next question is on Nabha Power project. Should we re — are you reconsolidating Nabha Power into accounts as an indication that something may be happening soon over there? You are in discussions with certain parties and you’re getting a feeling that realization value is higher than tariff value?

P. Ramakrishnan — Head, Investor Relations

So, Aditya, this is PR here. If you recall in the quarter-ending September 2020, the Board of Larsen & Toubro had decided to say that Nabha Power is looking for shooters, we are looking for prospective buyers. And since then, as a measure of conservatism, we restricted the carrying value in the both independent and consolidated financial statements, the same value, and we actually took in that quarter, an impairment hit as well. Since then from October ’20 to March ’22, we consol — because Nabha Power, we still not — we have not executed a firmed up bean like the way we have done for IDPL. So we were continuing to report the revenues and everything. But whatever reports, whatever profit that the company was accruing was not getting — was getting reversed, which means we were not taking the profits.

Now since then, for the last one year or so, the company’s performance has definitely shown an uptick in terms of very improved PLF of almost 91% — 85%, sorry, where our availability factor was 91% for the year. Improved PLF and a lot of cases that was there in between the legal court, most of the cases went into Nabha’s favor and practically speaking now the company has completely in terms of operations and in terms of the overall balance sheet has [Indecipherable].

So if you take by way of discounted valuations of the future cash flows, definitely the company’s value has gone up. And when you compare it with what is called comparative benchmarks vis-a-vis listed companies in this field, that also has gone up. So, of course, we take the benchmarks more as a reference point. But since because of the discounted valuations on the back of discounted cash approach has gone up. So to the extent of the profits that the company posted has been taken. I hope I have clarified your…

Aditya Bhartia — Investec — Analyst

Understood. That’s very clear. Thank you so much, sir.

Operator

Thank you.

P. Ramakrishnan — Head, Investor Relations

I have a request. Since we are now towards the end of this call, maybe few of you can take — restrict to one question, please. One question please for each of the people who want to ask. Yes, go ahead, please.

Operator

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

Sumit Kishore — Axis Capital — Analyst

Good evening, Mr. Shankar Raman and PR. My question is again on margins. For a five-year period till FY ’21, your core margins were in the range of 10% to 10.5%. You have clarified in your first response to a question regarding the new normal that margins are entering into. And your guidance for this year is 9%. You also mentioned that 60% of the impacted projects have already been executed, another 40% in the next two years. But are you going to move closer or if at all to your 10% to 10.5% trajectory once all these problems are sorted? And what is the extent of the unrecognized claims where you are reasonably confident and which have not really reflected in your margins over last two years?

P. Ramakrishnan — Head, Investor Relations

Okay. So, Sumit, this is PR. I will take that, because I think this is the fifth time or the sixth time the same is creeping up. So, let me try to answer it. So, yes, we have given that today when we have printed 8.6% for FY ’23, we are looking at definitely an improvement. We believe that the worst is behind us in terms of the projects that we secured before COVID, the projects that we secured during COVID went into execution at higher material costs. And we got — because of COVID, there was a stoppage of work, which enabled us to get time extension from the customers and thereby executing the project. So, time extension need not necessarily mean value extension in terms of additional claims. Time extension only protects us to say the customer has no right on the terms of the contract to levy any sort of punitive damages.

But definitely extended time stay in the projects also has its cost implications. And a combination of, I would say, time extension leading to cost and also higher material prices that we witnessed in the last year and to some extent sweeping into the current six months for projects that were back prior to COVID and during COVID is one of the reasons — is a combined reason, I would say, that where we are see margins at 8.6%.

As Mr. Shankar Raman talked about that this particular project execution trajectory is going to see possibly the end of — by FY ’24, the mix of these projects will be hopefully coming to a close, as orders that we have secured during the later part of FY ’22 and in the current year obviously factors into account. I will say the current material prices and to some extent the margin trajectory will be definitely protected. But all of this getting into execution more for us to recognize margins is going to happen in the later part of FY ’24.

So, at this juncture, it would be — not be possible to say in terms of how much of these claims, because as you know, as a EPC contractor, definitely we will be putting up — we are putting up the case [Phonetic], but to what extent — once the project is handed over, to what extent it is getting cleared by the client is a question of negotiation and discussions and settlement at that point of time.

So, with this, I would like to reemphasize that, at overall Projects and Manufacturing level what we have printed for 8.6% seems to have bottomed-out. We should be seeing an improvement and that is the reason we are giving a comfort that we do expect an improvement of almost 40 basis points to 50 basis points over 8.6%. But that would happened in the later part of FY ’24. FY ’25, hopefully, we should be seeing a major part of the orders that we have secured recently getting into, I would say, margin recognition threshold. Hopefully, I think, that should be coming back. In terms of what margins we will see, as you know, we typically guide the margins only for the year and for obvious reasons it is impossible for us to give s guidance beyond a year considering the varied nature of the Projects business.

Sumit Kishore — Axis Capital — Analyst

Thanks a lot, PR.

Operator

Thank you. The next question is from the line of Pulkit Patni from Goldman Sachs. Please go ahead.

Pulkit Patni — Goldman Sachs — Analyst

Sir, thank you for taking my questions. Sir, two quick questions. One, on the Hyderabad Metro, the ridership improvement has been very significant if you see year-on-year. But professional profitability has improved a little bit and that too because of financing. Any ballpark number where we think we can get EBITDA positive on Hyderabad Metro, because despite doing almost 400,000, we are seeing losses are pretty — pretty meaningful? So that would be question number one.

P. Ramakrishnan — Head, Investor Relations

Yes. So, in terms of Hyderabad Metro, if I have to really talk about, just to give a construct, today the ridership that we are witnessing in the current quarter on a normal weekday is ranging between 4.4 lakh to 4.5 lakh, and during the holidays and weekends, it ranges between 3.5 lakh to 3.6 lakh or so. Now for the benefit of all, if I take a construct that the average ridership for say FY ’23 — sorry FY ’24 the current year, one want to assume 3.6 lakh was the previous year. If you assume at around 400,000, so a 3.61 lakh average ridership, the total fare revenue has been in the range of INR450-odd crores. If you take 400,000 ridership, with an average realization of INR35 per passenger or per trip, then you can assume that the topline should be going around INR500-odd crores at 400,000.

Now in terms of the interest cost, the total external debt that the L&T Metro Rail Corporation SPV — external debt is around INR8,000 crores comprising of around INR8,000 crores of — INR8,000 crores of short-term NCDs and INR5,000 crores of — medium-term NCDs and INR5,000 crore of short-term commercial paper.

So, all of this, what I spoke now, if you can, since the NCDs and the commercial papers are listed, so the entire financials of the metro has actually been filed in the stock exchange. And actually what I gave you is the overall context of the ridership, the fare revenues, what we can assume as ridership for FY ’24 and what kind of EBITDA one can see.

R. Shankar Raman — Whole-time Director & Chief Financial Officer

Also, Pulkit, Shankar Raman here. There has been a development in terms of fare fixation committee. Agreeing that the sponsors, namely L&T can subject to demand/supply conditions revise the fares. So, at the moment, all the projections that we’re talking about is based on the fares that we are currently collecting. If things settle down and this work from home, etc., further moves towards work from office, I think — and the general population gets more comfortable with the usage, we do expect that there could be an opportunity along the way to relook at the fares. And that will also be another kicker, depending on how much we are able to do this.

Pulkit Patni — Goldman Sachs — Analyst

Got it. Sir, just one quick one on the power JVs. I mean, we’ve been talking about order — potential orders in this segment and we know that it’s been tough. What is the thought process about running these businesses? Could we look at, you know, doing something else on those factories over time? Just your thoughts on this thermal power JVs and their future?

P. Ramakrishnan — Head, Investor Relations

It’s under discussions, because we are also talking to partner, our partner. And we’re trying to figure out a way as to what is to be done, because these are good capacities that have got created. And it will not be appropriate just to scrap it. Of course, the plants can always be used, because it’s space which we use, but to some extent, export of some of these equipments is also possible, subject to the JV partner willing to root some of the businesses through us. So, right from the investment being bought over by them to the plant being used for their requirements to we trying to do something else, all of that getting discussed because I think we do recognize this energy transition is a major implication in terms of whatever we have created on ground capacity. But let me share the details only when we progress a little more clearly on one of these various options that we trying to evaluate.

Pulkit Patni — Goldman Sachs — Analyst

Sure, that’s useful, sir. Thank you.

Operator

Thank you. The next question is from the line of Aditya Mongia from Kotak Securities. Please go ahead.

Aditya Mongia — Kotak Securities — Analyst

Thank you, everyone, for the opportunity. My question was more specific on the working capital situation on the way it is improving. Should we be incurring from 16% working capital as a proportion of sales number that the intent of the customer is to make us execute faster. I’m saying so because obviously at the back side there is — there were changes that had happened on the procurement side of things that ensured at an incremental order, the payment should be very, very prompt. Has that started to kind of [Indecipherable] on a broad based basis for you?

P. Ramakrishnan — Head, Investor Relations

So, Aditya, if I understood it right, the way you — I mean, your question is that do you expect an improvement revenue if the working capital, the way we are managing it is a little more — made more flexible. Is this what you referred to?

Aditya Mongia — Kotak Securities — Analyst

No, I’m basically trying to assess that obviously we are — I’m trying to assess the possibility of working capital further coming down if there is a pure intent on customers to go in that direction.

P. Ramakrishnan — Head, Investor Relations

So, definitely, I mean, if you see structurally from the Indian economy perspective since a major part of the order book is oriented towards our exposure to government in some form or the other, and given the fact that the government finances have improved over the last two years or so. So we have definitely seen a more timely certification of the work done and the payments happening on time.

And I also like to mention here that the GCC part of the order book is also increasing. And typically in the GCC countries, the clients paying on time and start to paying the bills time happens at a positive scale. So to the extent of a larger share of the GCC order book coming in also has enabled us to overall improve working capital at a segment and at a Group level.

Aditya Mongia — Kotak Securities — Analyst

I just want to pitch in one more question, sir, over here. Sir, on the GCC side of things, the [Indecipherable] are quite bullish for the near term. And we understand that, let’s say, the entire territory in hydrocarbon space is becoming a larger proportion of our overall business. Does that kind of worry [Indecipherable] point of time beyond the next six months to 12 months that we are so exposed to hydrocarbon, especially that in the Middle East?

P. Ramakrishnan — Head, Investor Relations

So, in the Middle East, our opportunities today, the way we are looking at is a combination of hydrocarbons and infrastructure. And when we talk about infrastructure, the opportunities largely center out renewables and power transmission, distribution and obviously opportunities in the non-ferrous sectors that come once in a while discreetly. And we do see in the next year, that is FY ’24 and possibly maybe FY ’25 as well, the opportunities from the refinery or the hydrocarbon side continue to be holding good for us in terms of better order prospects, and hopefully larger orders as well.

Aditya Mongia — Kotak Securities — Analyst

Those were my questions. Many thanks for response.

P. Ramakrishnan — Head, Investor Relations

Thank you, Aditya.

Operator

Thank you. The next question is from the line of Deepak Krishnan from Macquarie Capital. Please go ahead.

Deepak Krishnan — Macquarie Capital — Analyst

Thank you for the opportunity. My question is more about that ROE target. How do we reach the 18% from the 12.2% awarded in the next three years, given that core margins will still see some issues here for FY ’24, like what end margin do we kind of assume when we have the 18% ROE target in mind?

P. Ramakrishnan — Head, Investor Relations

So, Deepak, I guess, I think this we have covered in numerous calls and conversations. So the way to see it across is that the — if you see the slide that we have put it as part of our additional slides in the deck, so the two major, I think, margin erosions are in a position of the development projects, which is the concessions part of the business. So once that is done, definitely we can see in terms of an improvement of 1.5% to 2%, which means reduced losses or profits from Hyderabad Metro through a combination of restructuring of that company’s current position, plus the prospective of an investor coming in, maybe not now, but maybe definitely after two years to three years, once the assistance that has been declared by the local government comes in and we are able to monetize the TOD rights that we are looking at maybe in the current year.

So, improved performance of Hyderabad Metro, divestment of IDPL hopefully should get completed in the next six months or so. And also hopefully, I think, with improved performance in Nabha, we should be looking forward to a buyer who can possibly match our price points. And with this, the margins — the ROE stack itself will probably improved by 1.5%, 2%.

The second point is, I would say, the steady growth of our traditional portfolio of projects and manufacturing, which today in the current year is almost 19-odd-percent. If we are able to manage what we are talking about sort of a mid-teens growth in the overall growth portfolio of the entire Group, with a better margins, I guess, that should add-up to another 2% into the ROE. And the last 2% could be a combination of as Mr. Shankar Raman referred to in terms of higher payouts to shareholders. So it is a 12 plus 2 plus 2 plus 2 kind of a strategy.

Deepak Krishnan — Macquarie Capital — Analyst

Sure, sir. Maybe just one follow-up. Any update on the cash from the AP Government for Hyderabad Metro project?

P. Ramakrishnan — Head, Investor Relations

So, of course, in their local budget, they have allocated INR1,000 crores, INR1,500 crores for last year and the current year, and as part of disbursement, which will flow into the L&T Metro Rail SPV. So last year, that is till March ’23 we got around INR100 crores and we have got some token sum in the current year. Hopefully, I think, this year we should see a sizable amount of money coming in.

Deepak Krishnan — Macquarie Capital — Analyst

Sir, those were my question. All the best for the future quarters.

P. Ramakrishnan — Head, Investor Relations

Thank you, Deepak.

Operator

Thank you. Ladies and gentlemen, we’ll take that as the last question. I now hand the conference over to Mr. P. Ramakrishnan for closing comments. Thank you, and over to you, sir.

P. Ramakrishnan — Head, Investor Relations

Yes. Thank you, ladies and gentlemen. I hope we have been able to explain the context of our performance for FY ’23, and of course, you would have heard the comments of Mr. Shankar Raman in terms of how we are looking at FY ’24 and the near-term across segments, across margins across businesses. With those few words, thank you for the patient listening. In case, anyone of you have any follow-on questions on the numbers in terms of stack-up, please do not hesitate to call me or my colleague, Harish. We will be definitely there to help you out. With those — with that, thanks for call — thanks a lot for joining this long call. Thanks once more. Thank you.

Operator

[Operator Closing Remarks]