Larsen & Toubro Ltd

NSE:LT

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the Larsen & Toubro Limited Q4 FY '22 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. Thank you, and over to you, sir.

[Parameswaran Ramakrishnan, executive]

Thank you, Stephen. Good evening, ladies and gentlemen. A very warm welcome to all of you into the Q4 FY '22 earnings call of Larsen & Toubro Limited. We have with us on the call today Mr. S.N. Subrahmanyan, CEO and MD; and Mr. Shankar Raman, Whole Time Director and Chief Financial Officer. The analyst presentation was uploaded on the stock exchange and in our website around 5:30 p.m. This time, the presentation contains our Q4 and FY '22 numbers and an overview of strategic plan ending FY '26. Hope you all had a chance to have a quick look at the numbers.

As usual, instead of going through the entire presentation, I will walk you through the key highlights for the quarter in the next 15 to 20 minutes. And thereafter, I will request Mr. S.N. Subrahmanyan to take us through the key goal post embedded in our group strategic planned road map.

Before I begin the overview, a brief disclaimer. The presentation, which we have uploaded on the stock exchange and our website today, including the call proceedings now, contain or may contain certain forward-looking statements concerning our 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 the quarter ended 31st March, '22, the Indian economy displayed stability despite rising Omicron cases and the global headwinds emerging from geopolitical tensions. Our group performance can best be described as bouyant amidst this continuing global macroeconomic volatility.

Let me now cover the 5 years financial performance parameters for Q4 FY '22. Our group order inflows for Q4 FY '22 at INR 739 billion registered a sequential and Y-on-Y growth of 47% and 46%, respectively. Within that, our Projects & Manufacturing businesses secure order inflows of INR 611 billion for Q4, thereby registering a sequential and Y-o-Y growth of 61% and 55%, respectively. Our Q4 order inflows are mainly from infrastructure, hydrocarbon and defense.

We have backed a fair share of international orders in the quarter. The couple of orders that we have received in Q4 have not yet been filed in the stock exchanges as we are still awaiting formal customer clearances or approvals. Now on a full year basis, our group reported order inflows of INR 1.93 trillion, registering a growth of 10% over the previous year. Again, within that, our Projects & Manufacturing business secured order inflows of INR 1.44 trillion. You would recall that we had guided for up to a low to mid-teens order inflow growth for the year.

Whereas the domestic order pronouncements and tendering activity continued at a brisk pace during the year, the award finalizations were a little delayed. The award tender ratio in the current year was 51% as compared to 70% for FY '21. At a macro level, even though the central government and PSU CapEx continued at a brisk pace, the state government CapEx got deferred. On the contrary, major traction was seen from the international region, especially from the GCC countries where the company backed large value orders during the year.

We have an encouraging prospects pipeline of INR 8.53 trillion for FY '23, which comprises of domestic prospects of INR 6.31 trillion and international prospects of INR 2.22 trillion. You would recollect that our total order prospects at the beginning of last year, that is, April 2021, was at INR 9.06 trillion. I would like to mention here that the degrowth or the minor degrowth in the prospect pipeline over that of the last year is mainly because we have been a little selective in the opportunities that we are targeting for FY '23.

Moving on to the order book. Our order book at INR 3.58 trillion as of March '22 is once again at a record high. As our Projects & Manufacturing business is largely India-centric, 73% of this order book is India-based and the rest is overseas. During the year, we have been beneficiaries on some large orders in the infrastructure and hydrocarbon segments and which is why our incremental order book has moved up from 21% at the beginning of the year to 27% by March '22.

Now as of the international order book of INR 952 billion, which is a subset of the total order book of INR 3.58 trillion, around 76% of this INR 952 billion is from GCC countries and 13% is from Africa. Clearly, the GCC CapEx in infra and hydrocarbon is on an upswing post recovery in the oil price.

The breakdown of the domestic order book of INR 2.62 trillion as of March '22 is as follows: central government comprises 11%, central government orders; state government orders comprised 29%; PSU or state-owned enterprise contribute to 45%; and the balance of 16% is from the private sector. Approximately around 30% of our total order book of INR 3.58 trillion is funded by multilateral and bilateral funding agencies.

As you can see from the presentation, 89% of our total order book is from infrastructure and hydrocarbon. Again, within infrastructure, our order book is well diversified across the various businesses, namely heavy civil, water, power transmission distribution, buildings and factories, transportation infrastructure and minerals and metals. Finally, during the year, we have deleted around INR 70 billion of nonmoving orders from the order book, and our slow-moving orders in the current order book is a measly 2% to 3%.

Coming to revenues. Our group revenues for Q4 FY '22 at INR 529 billion registered a sequential and Y-on-Y growth of 34% and 10%, respectively. The international revenues constituted 33% of the revenues. The IT and TS portfolio continued to report industry-leading growth in Q4 as well. In the Projects & Manufacturing businesses, our revenue for Q4 FY '22 were at INR 400 billion, thereby registering a sequential and Y-on-Y growth of 47% and 9%, respectively. The better execution in infra and power segments during the quarter was to some extent offset by other businesses. I will cover the details a little later when I cover each segment.

Now for the year, both our Projects & Manufacturing as well as the group revenues have grown at 15%, which is more or less in line with the guidance that we gave at the start of the year. Even going forward, and as a philosophy, we will continue to calibrate our execution in line with the cash flows that we generate. Finally, our current labor availability is around 263,000 as of March, which is near normal levels, and more than 97% to 98% of both our employees and contract workmen have been -- have received both the doses of the COVID vaccination.

Moving on to EBITDA margin. Our group level EBITDA margin without other income for Q4 FY '22 is 12.3% vis-a-vis 13.3% in Q4 FY '21. However, for the year FY '22, our group level EBITDA margin without other income at 11.6% is up 10 basis points over the previous year. The detailed breakup of the EBITDA margin business-wise is given in the annexures to the presentation.

You would have noticed that the EBITDA margin in the Projects & Manufacturing business for Q4 FY '22 is at 10.2% for the current Q4 vis-a-vis 12.7% in Q4 of FY '21. Also for FY '22, that is the full year, our EBITDA margins in the Projects & Manufacturing portfolio is 9.2%, down 90 basis points for the year. This drop of 90 basis points for the year is explained by job mix, cost headwinds and delayed claims certification.

All of you would recall that we had guided that we will maintain the margins in the Projects & Manufacturing portfolio in the current year at in and around the same levels of 10.1% for the last year. Although the cost headwinds were a known fact, the non-certification of client claims and the job mix pushed us behind during the quarter and impacted the annual performance as well.

Our operational PAT for the quarter at INR 36 billion registered a growth of 6% over the previous year, largely aided by lowering -- lower borrowing costs, depreciation and tax expense. The full year operational PAT at INR 85.7 billion registered a growth of 23% over the previous year despite the margin headwinds in the projects and manufacturing businesses.

For FY '22, below the EBITDA line item, lower borrowing costs, in line depreciation charge and lower tax expense are contributing to improved profitability. The group performance, the P&L construct, along with the reasons for the major variances under the respective function heads, is provided in the analyst presentation.

Coming to working capital. Our NWC to sales ratio has improved from 22.3% in March '21 to 19.9% in March '22. This is a significant improvement from the guidance that we gave at the beginning of the year, which was in and around 22.3% by March '22. The NWC sales moved lower during the quarter primarily due to better collections, improved vendor payables management and also due to the fact that the revenues moved higher.

Our group level collections, excluding financial services for Q4 FY '22, is at INR 0.43 trillion vis-a-vis INR 0.39 trillion in Q4 FY '21. Similarly, for FY '22, we collected INR 1.35 trillion vis-a-vis INR 1.26 trillion in FY '21. The last quarter of any financial year is generally a seasonally strong collection quarter for customer collections, especially with respect to the Project & Manufacturing business portfolio. However, given the volatile cash flow in this segment, we do expect some variability in NWC to sales ratio in the coming 2 quarters of FY '23.

Moving on to balance sheet. If you glance through the balance sheet given in the annexures to the presentation, one will notice that at a group level, the gross as well as the net debt ratios have improved over March '21. This is mainly due to the repayment of liabilities at the parent level, which was around INR 43 billion. Financial services saw a reduction of INR 23 billion, and Development Projects segment reported a reduction of around INR 25 billion.

Finally, our return on equity for FY '22 is 11% vis-a-vis 16.2% in FY '21. As you are aware, our ROE for March '21 includes the benefit of the onetime gain on the sale of the divestment of the Electrical & Automation business net of exceptional items.

Our recurring ROE for FY '21 was 10.1%. So thereby, there has been an improvement, almost 1% over FY '21 on a like-to-like basis. We are improving progressively, and let me assure you that the return ratios will be pursued aggressively going forward as well. Our robust business portfolio, including newer businesses, focused on cash generation, and distribution and an eye on capital employed and finding the divestment of some of these concession assets will lead up to better ROEs in the future.

Very briefly, I will now summarize the performance of each business segment before we give our final guidance -- comments on the guidance for FY '23. First, infrastructure. Coming to order inflows, our Q4 FY '22 order inflows are well spread across various subsegments. Infrastructure segment secured orders of INR 451 billion for Q4 FY '22 registering a healthy growth of 44% over the Q4 of the previous year, mainly with the receipt of a mega order in GCC country and other notable awards for Metro Expressway Health public spaces.

On the domestic side, the conversion of tenders to awards continue to be on the lower side vis-a-vis Q4 of last year. We believe that this temporary and ordering momentum will continue to pick up going forward. For the year FY '22, infrastructure secured order inflows of INR 935 billion, registering a degrowth of 9% compared to the previous year, which had witnessed the receipt of the large value Mumbai, Ahmedabad high-speed rail packages.

Our order prospect pipeline in Infra for FY '23 is around INR 5.72 trillion, comprising of domestic prospects of INR 4.57 trillion and international prospects of INR 1.15 trillion. The subsegment breakup of the order prospects in Infrastructure segment is as follows: Power Transmission & Distribution, 23%; water 21%; transportation infrastructure, 19%; heavy-civil infrastructures 17%; buildings and factories 16%; and Minerals and Metals 4%. The order book in this segment at INR 2.61 trillion as on March '22 has a book bill of around 3 years.

The Q4 revenues at INR 297.3 billion registered a growth of 13% over the comparable quarter of the previous year, representing a normalized execution. For the year FY '22, the revenues at INR 724 billion registered a growth of 18% with a good pickup in execution momentum of the large orders that we have in this portfolio. Our EBITDA margins in this segment dropped from 11.5% in Q4 FY '21 to 9.2% in Q4 FY '22, largely due to job mix, commodity price escalation and the nonreceipt of claim from clients. Due to the drop in a Q4 FY '22 margin, our FY '22 margin for this segment contracted by around 30 basis points to 8.2% over the previous year.

Moving on to hydrocarbon. L&T hydrocarbon engineering, a wholly-owned subsidiary has been amalgamated with the parent with effect from April 1, 2021, in terms of the scheme approved by the National Company Law Tribunal. On the performance side, the receipt of multiple domestic and international orders in Q4, buyers order book for this segment. For the year, FY '22, hydrocarbon business secured orders of INR 309 billion, registering a strong growth of 74% when compared to FY '21, mainly due to the receipt of mega orders from GCC, both in the onshore and offshore verticals.

The order book for this segment stands at INR 564 billion as on March '22, with an international order book constituting 60%. The Q4 FY '22 revenues at INR 52.4 billion registered a degrowth of 3% over the comparable quarter of the previous year, largely due to temporary supply chain disruption in a couple of domestic and international jobs. For the year FY '22, revenues at INR 191 billion registered a growth of 13% with onshore portfolio and order book gaining execution momentum. The EBITDA margin for Q4 FY '22 is at 9.7% vis-a-vis 12.5% in Q4 FY '21. The previous year Q4 margin had the benefit of cost savings upon job completion. The full year margin at 8.7% declined by 50 basis points, reflecting the input cost inflation and a change in the composition of the jobs amongst the subsegments.

Coming to power. A subdued ordering environment continues in the thermal business due to the larger emphasis on renewables. However, opening order book drives healthy execution during the quarter as well as for the full year. The Q4 FY revenue in this segment, the Q4 and the full year revenue in this segment at INR 14.8 billion and INR 44.2 billion registered a growth of 22% and 39%, respectively. The EBITDA margin is at 5.2% for Q4 FY '22 vis-a-vis 8.5% for Q4 FY '21, that is largely explained by the release of cost provisions in a few projects in Q4 the previous year.

Consequent to the drop in Q4 margin, our full year margin is at 3.9% down 70 basis points over last year. As you may be aware, the profits of the boiler, turbine and the other JV segments -- other JV companies in this segment are consolidated at the PAT level using equity method.

Moving on to Heavy Engineering. The deferral of awards impacted order inflows for the quarter. Previous year Q4 had the benefit of a large value domestic order. The late receipt of orders in the current year impacted revenues for Q4 of this year. Revenues for Q4 FY '22 at INR 8.7 billion registers a degrowth of 13% over the corresponding quarter of previous year. The full year revenues at INR 27.2 billion remained flat over the previous year as some of the orders are still in early stage completion. The EBITDA margin in the segment at 24.7% in Q4 FY '22 vis-a-vis 29.3% in Q4 FY '21. The Q4 of the previous year had the benefit of price variation and early completion bonus in a couple of jobs. The full year margin at 19% registers a drop of 70 basis points primarily due to lower export incentives in the current year.

Coming to defense. Let me mention here that on the back of the government's trust towards indigenization, we will continue to remain optimistic for securing decent order wins in this segment in the medium term. Having said that, a receipt of a couple of orders in the shipbuilding vertical of this segment helped us to increase the order book. The revenues at INR 8.9 billion for Q4 FY '22 registered a degrowth of 21%. For the year FY '22, the revenues at INR 32.2 billion registered a Y-o-Y decline of 5%. The tapering of large jobs under execution led to the fall in revenues in Q4 and full year.

The EBITDA margin for this segment for Q4 FY '22 is at 23.3% vis-a-vis 29.3% in the Q4 of last year. For the year FY '22, EBITDA margin is at 20.2%, a decline of around 200 basis points. Both the Q4 and the full year margin variance is explained by certain cost savings in the completed jobs in Q4 of the previous year.

Moving on to Development Projects segment. This segment includes the power development business, comprising of Nabha Power; Uttaranchal Hydropower plant up to the date of its divestment, which was August 2021; and Hyderabad Metro. As you are aware, the roads in the transmission line concessions, which are a part of L&T IDPL, are consolidated at a PAT level. The majority of revenues in this segment is contributed by Nabha Power. A lower PLF during the quarter due to routine maintenance explains the Nabha revenue degrowth, whereas subsiding Omicron will have led to improved metro ridership, thereby resulting in improved revenues for Hyderabad Metro during the quarter.

To give you some statistics, the average Metro ridership from 55,000 passengers a day in Q1 of FY '22 to 146,000 passengers in Q2, 218,000 passengers in Q3 and around 199,000 passengers in Q4. For the full year, the average ridership was around 155,000 as compared to 67,000 for FY '21. We are happy to report that as we speak, the current ridership in Hyderabad Metro has crossed the threshold of 300,000 passengers per day. The Q4 FY '22 margin in this segment at 2.4% is contributed largely by metro operations as Nabha margin is not being recognized from Q3 of the previous financial year. The Q4 of the previous year had an impact of an exceptional item in the Nabha margin.

The improvement in the average daily ridership has enabled Metro to report positive EBITDA for Q4 and FY '22 as well. The Metro at a PAT level, we have consolidated a loss of INR 3.49 billion in Q4 FY '22. The operating and amortization costs are around INR 0.75 billion each, whereas the interest cost is around INR 2.9 billion for the quarter. For the year FY '22, the Metro reported PAT loss of INR 17.51 billion as compared to INR 17.72 billion last year.

At this juncture, I would like to give a quick status update on the divestments of our concessions portfolio. As all of you are aware, our stake in the hydro power plant was successfully divested in Q2 FY '22. For Nabha, various divestment options are being exported currently.

Coming to IDPL, we are exploring the possibility of divesting our remaining 51% stake in favor of third-party investors. For Metro, we have a couple of updates. The Government of Telangana has issued an order, which outlines the various forms of support for the Metro operations. The benefits will flow to the SPV, which is as follows: the refinancing of the term loan in Q3 FY '22 helped SPV save interest cost of around INR 90 crores during the current quarter. These are recurring savings, which the Hyderabad Metro SPV will also report going forward.

Coming to the government assistance, we are expecting an assistance of INR 3,000 crores from GOTS in 3 installments to be paid as INR 1,000 crores each year starting from FY '23 onwards. The repayment of this soft loan would be done at the 16th anniversary from the disbursement. The concessional rate of interest on the loan will be known over a period of time. The concession is now confirmed to be available for the full tenure of 60 years that is up to 2072. We have also received an in-principle approval for implementing an InvIT for the project in accordance with SEBI regulations. For the TOD rights, there is an approval for sublease up to 2072 independent of the Metro operations.

Fourth, discussions are also going on with third-party investors seeking a fund infusion into Metro. However, it would be a little premature to comment on the likely clause closure date. But finally, to conclude on L&T Metro in Hyderabad, the prospect of improved ridership, a paced TOD monetization program, the confirmed government assistance with soft loan and with the recently concluded debt refinancing, our performance parameters for Metro should look up in FY '23.

Coming to the IT & TS portfolio. Our revenues for Q4 FY '22 at INR 87.6 billion, equivalent to USD 1.18 billion, registered a growth of 30% over the corresponding quarter of the previous year. For FY '22 as a whole, the revenues at INR 322.6 billion, equivalent to USD 4.4 billion equivalent, register a growth of 27% reflecting the continuing growth momentum in the sector with a surging demand for technology-focused offerings. The business outlook for this segment continues to be robust. Lots of spend today are being directed towards cloud, data security and intelligence. The margins for this segment is a function of wage cost utilization, onshore/offshore mix and operational efficiency.

Finally, as all of you may be aware, the Boards of LTI and Mindtree in their respective Board meetings held on May 6, 2022 have approved the scheme of merger between the 2 companies that is subject to receipt of respective shareholders, creditors and regulatory approvals. I will not dwell too much on this segment as all the 3 companies in this segment are listed entities and the detailed fact sheets are already available in the public domain.

Moving on to the Others segment. This segment currently comprises reality, industrial machinery, valves, Smart World Communications and the digital businesses. As you may be aware, the EduTech business was launched on October 15, 2021, whereas L&T Sufin was launched on March 7, 2022. These are the 2 new businesses incubated under digital portfolio.

During the quarter, a strong revenue growth in Realty and Industrial Machinery business was offset by subdued revenues in the Other businesses, thereby leading to a flat growth. For the full year ago, this segment reported revenue growth of 2%. There is a broad-based improvement in margin across the businesses in Q4 of the current year. The benefit of gain on a sale of commercial property in the Realty business in FY '21 explains the margin variance for the segment on a per year basis.

Next, we move to Financial Services segment. Here again, L&T Finance Holdings is listed, and the detailed results are available in the public domain. I would like to mention here that the strategic deliverables for this business revolve around higher retailization of its portfolio, a strong asset quality and improvement in return on assets. The Q4 FY '22 revolve around disbursement in the focus areas, and the share of retail book has moved up to 51% by March '22. Improved profitability in Q4 and FY is a function of lower credit cost. And finally, sufficient growth capital is available in the balance sheet.

Coming to the last part, we remain optimistic on India recovery amidst the continuing global geopolitical uncertainty. Further, we are also confident around the CapEx recovery in GCC due to the improved oil prices. The supply chain disruption and the cost pressures are expected to continue into the near term. For the year FY '23, we are guiding for a 12% to 15% growth in the group order inflows and revenue, and we expect the margin with respect to our projects and manufacturing businesses to remain around 9.5%. On the working capital at a group level NWC to sales, although we will maintain to -- and we'll endeavor to maintain around 20%, but given the inherent cash flow volatility in the EPC segment, we are guiding for a range of 20% to 22% for FY '23.

Thank you, ladies and gentlemen, for the patient hearing. I will now request our CEO and Managing Director, Mr. S.N. Subrahmanyan to take us through our strategic plan objectives up to FY '26, post which we will take question and answers.

Finally, when we get into Q&A, I would request all of you to restrict your questions to the economic environment and strategy to make the best use of our time. The bookkeeping questions can be addressed to me and the Investor Relations team separately. Over to you, Mr. Subrahmanyan.

[S. Subrahmanyan, executive]

Thank you, Ram. Good evening to all the analysts and investors who have logged on to this call. Hope all of you are doing well and are staying safe. Taking the opportunity here, I'll talk about the macro context as you see it on the group's strategic plan as we see it ending in FY '26.

On a macro level, as all of you are aware, there has been many challenges over the last 24 months, during which we could not achieve much physical progress in our EPC project business and manufacturing business for nearly 8 to 10 months for various reasons. We also lost precious time in mobilizing and demobilizing our personnel. Despite all this, FY '22 has ended on a strong note, something that is reflected in our financial results characterized by the sustained effort that has gone.

Here, I would like to particularly emphasize on the fact that people have been a greater asset -- biggest asset. Engineering and people skill sets are the most valuable attributes across all our businesses. We will, let me tell you that, encourage and give the [ young ] and energetic people in the company all possible opportunities to grow.

We had several reasons to celebrate, too. We won some important mandates across our businesses that have cumulatively swelled our order backlog to never before seen levels, launched new business initiatives and finalized the Lakshya 2026 strategic plan.

Both the government and RBI needs to be complemented for the fiscal and monetary support during this time. Structural reforms carried out in India over the past couple of years will lead to sustainable and improved quality of growth in future. Various incentives schemes in the government will lead to pickup in manufacturing and exports. India's FY '23 budget focuses on consolidation with an infrastructure CapEx trust.

Government's focus on CapEx is also clear from the various initiatives starting from the national infrastructure pipeline, the PN [indiscernible] program, creation of developmental finance institutions and such. We remain optimistic on the return of private CapEx in India on the back of improved business confidence, better demand outlook, healthy balance sheet and the PLA incentives in some of the sectors. The evolution of digital infrastructure and the focus on ESG sustainability complaint businesses like renewables and green hydrogen are emerging trends.

On the international front, one can see the emergence of a new world order. The world at large realizes the pitfalls of relying too much on one country for a bulk of supplies. Those shift away from this will not be immediate. Many countries have adopted some of the other version of Atmanirbhar Bharat that is localization. One can see this in various forms throughout Middle East and certain parts of Africa.

We see CapEx-led growth from the GCC countries in the medium term to continue. GCC, as all of you are aware, is the second biggest market for our EPC projects business. Secondly, we expect growing infrastructure opportunities in the African subcontinent on the back of enhanced bilateral/multilateral funding support.

Some of the major measures that we'll be monitoring would be high commodity prices and, of course, talent retention. The macro backdrop from FY '17 to FY '21 was subdued in the initial years, largely due to government reforms. This got worsened due to COVID in the final years. Our group performance can best be described as affiliate amidst these macro headwinds. Despite the lack less public and private CapEx, our projects and manufacturing businesses posted noteworthy performance during this period.

The IT & TS services portfolio outperformed over the Tier 1 and Tier 2 peers. We successfully integrated Mindtree during this period. The IT & TS portion of our services portfolio in a way helped us to counterbalance the EPC projects business cyclicality during the last 5 years. We also managed to unlock capital through the major divestment of the electrical and automation business.

If I were to summarize our previous strategic plan performance in a sentence, I would say our expansive portfolio, a wide capability spectrum, multi-geography international presence and a strong balance sheet helped us to deliver themselves in these times.

Now going forward to the strategic plan Lakshya 2026, let me now move on to the key themes around where the current strategic plan FY '22 to FY '26 is based. These are: one, value-accretive growth in the current business portfolio; two, exit exposure to concessions; three, incubate and scale up digital and e-commerce businesses; and four, enable business sustainability to improve focus on ESG.

We as an organization must constantly evolve, accept new ideas, revision our thought processes. New enthusiasm must prevail. We hope to practice this in a planned period. Our business portfolio now comprises of -- will now comprise of EPC projects, high-tech manufacturing and services. Let me elaborate on this.

EPC projects will comprise of construction in the energy business. The energy portfolio encompasses the current business of hydrocarbon and power. Additionally, the green EPC business targeting opportunities in the green hydrogen space will be part of this portfolio. We will be targeting order inflows and revenue growth of between 11% to 13% in this portfolio. On the execution front, our focus will be on timely or early completion. Profitability will be driven by a combination of resources, productivity, operational excellence and digitalization initiatives. Further, we'll strive to lower working capital intensity over time.

Value creation in this portfolio will be a function of margin improvement and lower capital employed. Hi-tech manufacturing will constitute heavy engineering, defense on the new additions comprising electrolyzers and battery, which is basically grid batteries. We'll be targeting order inflows and revenue growth of 18% plus in this portfolio. Robust order inflow growth will be a function of various indigenization programs expected during the plan period, and healthy execution will be driven by robust order book. We will target improved profitability in this portfolio through a combination of various initiatives revolving around digital excellence, automation, value engineering, factory 4.0 and on timely deliveries.

To give you some perspective of the new portfolio, electrolyzers, we will be entering the manufacturing of electrolyzers. We proposed to set up 500-megawatt capacity by 2026, which would be ramped up, up to 1 gigawatt by 2028. Technology tie-ups will happen in due course of time. In Phase I, we'll target alkaline. And in Phase II, it will be PEM, that is membrane technology. Expected capital outlay will be around INR 11 billion to INR 12 billion for 1 gigawatt. Project CapEx will be primarily equity funded, and we are targeting projects IRRs and high teens.

We also, as I said, would like to look at advanced chemistry cell manufacturing. This will be with a technology partner. Technology tie-up will happen in due course. We'll be looking for 5 gigawatts of cell manufacturing capacity and 3 gigawatts of battery module capacity by 2027. Total capital outlay is expected to be around INR 31 billion. Project CapEx will be majorly equity funded and high returns of IRR. The final details of the investments in electrolyzers and battery will be communicated as and when the plans get certified.

At this juncture, I would also like to clarify once again, especially in the manufacturing space that once again, and I've repeated, some of the concerns around our defense businesses. Our defense business is nothing but an extension of precision engineering capabilities and will continue to remain an integral part of our manufacturing portfolio. We reiterate once more, we reiterate once more, our defense business does not manufacture. We reiterate once more, our defense businesses does not manufacture any explosives nor ammunition of any kind, including cluster munitions or anti-personal land mines or nuclear weapons or components of such munitions. We also do not customize any delivery systems for such munitions.

I'll move on to the services business. It has 2 broad areas. The IT & TS business portfolio will comprise of LTI, Mindtree and LTTS. As stated earlier, the growing IT & TS business will continue to balance the risk and cyclicality associated with the traditional projects and manufacturing segment. The momentum from existing and emerging technology trends like cloud, digital, AI and Industry 4.0 is expected to continue in the near term. This portfolio retarget revenue growth in high teens during the plan period.

Augmenting digital talent holds the key to success. Inorganic growth opportunities will be appropriately targeted to grow this portfolio over time. The IT & TS portfolio will also include the recently incubated platform, Sufin and Edutech and the new additions of data centers. For data centers, we're looking to set up a pilot plan of 2.5 megawatts in the near term. This should be done in another month or so, and we intend to set up capacity of 90 megawatts by the end of its current plan period.

The financial services businesses will reorganize the existing lending portfolio and move towards retail very quickly. Growing digitalized retail portfolio should yield higher returns. The philosophy will be shrink to grow. Our primary focus is to improve profitability and return over the planned period. And this, hopefully, should result in vastly improved valuations.

There are some other businesses like realty, smart world communication, industrial products and machinery. The realty business will target growth in residential and commercial through multiple formats, but it will be predominantly residential. The primary focus of development using our existing capital land banks. We will endeavor to touch order inflow on revenue of INR 80 billion and INR 50 billion in the business FY '26. Smart World and Communications will migrate from the current EPC onto smart solutions provider. We will grow our industrial machinery and products portfolio comprising of construction equipment and walls on the back of improved demand.

The developmental projects, the concession portfolio largely constitute Hyderabad Metro, and we are unable to get out of it as this concession agreement. But we will derisk it, and this will be a business which is off balance sheet. Hopefully, we should complete the divestment of L&T IDPL and predominantly road concessions and Nabha Power during the early part of the current plan period. In Hyderabad Metro, a combination of capital restructuring, improved operations and TOD monetization will create value over time anyhow.

Our group financial targets would be revenue of about INR 2.7 trillion to INR 3 trillion by FY '26, registering a compound growth of about 15% over FY '21. The return on equity would be about 18% plus the FY '26. Our focus will be to ensure sustainable growth through profitable expansion and execution of the current business portfolio and incubating newer businesses during the planned period as explained.

Let me now cover the broad cash flow profile at the group level. Cash generation during the plan period will be a function of improved profitability and lower capital employed. Further capital and unlocking through sale of noncore assets will also boost cash balances of the group. We expect cash CapEx of around INR 100 billion to INR 110 billion to happen towards their existing businesses, comprising projects, manufacturing and realty, but these are normal capital expenditures. Around INR 60 billion to INR 70 billion will be towards new businesses like data centers, green EPC and BO electrolyzers and battery. The IT businesses will have white space acquisitions of maybe around INR 70 billion to INR 75 billion from the cash surpluses on their balance sheet.

Depending on how cash flows evolve and after necessary spends on CapEx, if possible, we will drastically reduce the debt on the parent balance sheet. Cash returned to shareholders will be through a combination of dividend payout as well as buyback, post adequate cash buffers on the balance sheet. We'll also consider stepping up payout ratios over time. Returning cash to shareholders on a regular basis will also aid ROE improvement and will be our mantra as we go forward.

On sustainability and ESG, as you're all aware, our company, L&T, Larsen & Toubro, has committed to water and carbon neutrality by 2035 and 2040, respectively. Our intent target on various parameters of enrollment, social and governance up to FY '26 are available as part of our strategic plan presentation, and you can go through it.

Finally, I would like to mention that we always practice the highest level of governance in the 8 decade-old group. We will uphold the value systems and integrity that has been the hallmark of Larsen & Toubro to grow the years. We'll not shy away from improvements and strive set up benchmarks going forward. We are in the plus and possible side of things and should clearly and positively continue to be there.

Ladies and gentlemen, thank you very much. Let me now hand it over to P. Ram for his closing comments before we take questions and answers. Thank you.

[Parameswaran Ramakrishnan, executive]

Thank you, sir. Before we get into Q&A, I just wanted to reemphasize as to what Mr. Subrahmanyan also spoke in terms of reconstitution of our segments, pursuant to the formulation of a strategic plan. So that is summarized in Slide 47 of our analyst presentation. But to quickly take you through, essentially what it means that the existing infrastructure segment will continue to remain reported as Infrastructure segment. The same applies to financial services, development projects and others.

The 2 changes that we are doing is, as part of the overall energy portfolio, what we report separately as hydrocarbon and power segments will get merged to form what we call as the energy portfolio. And similarly, Heavy Engineering and Defense Engineering, the 2 engineering or manufacturing partner of L&T will get consolidated to be reported as high-tech manufacturing. However, we will continue to -- while we report this has high-tech manufacturing as one segment, we will continue to explain or report the numbers that is related to the revenues from the Defense Engineering segment as an additional information.

The IT & TS portfolio that today comprises of the 3 listed entities, LTI, Mindtree and LTTS, will -- going forward will also add the new businesses that L&T is chalking out during the 5-year plan. And those are L&T Sufin, which is a B2B e-commerce platform; l&T EduTech, once more a digital tech engineering screening platform; and the investment in data services. So IT & TS will include the 3 listed entities and these 3 new digital initiatives. Other things remains the same.

So I hope you have had -- you would have got all the relevant explanations regarding our Q4 and FY '22 performance, and also heard Mr. S.N. Subrahmanyan take us through the objectives of L&T over the next 4 years, starting FY '23, FY '26. And with that, we can now get into Q&A.

[Operator]

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

[Mohit Kumar, analyst]

Congratulations on a very, very good order inflow and laying out this strategic plan. My first question is on the high-tech initiatives. You have said that you're going to enter into electrolyzer and active manufacturing. Is there any aspiration to be a leader in this segment? And any plan to export? And are we restricting our sales to electrolyzer and battery manufacturing and including like solar manufacturing or fuel cell? And is there any plan to set up hydrogen production system on our balance sheet? That's the first question.

[S. Subrahmanyan, executive]

It's a very good question to start with, so let me explain it like this. We want to be the green hydrogen space because black hydrogen -- black space that we are in, which is a coal-fired power station, we do expect that over the period of the plan and further will not see much traction. We do not want to be in polysilicon or solar modules and solar production or all that. That's ruled out. We don't want to be in that area either as a developer. But we will be there in EPC, as you know, but we'll not be there as a developer.

Now the whole idea of green hydrogen is to -- is the fact that in the future, we see -- we do see green hydrogen coming up. It's an imperative for the economy as the nation India spends more than $180 billion importing crude. Green hydrogen is a possible offset for that in the sense that we could reduce our dependence on crude and get into more hydrogen economy by fuel cells, hydrogen fuels, et cetera, but that's a little futuristic. But it can happen provided the hydrogen cost comes down. Today, it's not possible because hydrogen cost upwards are $4. It needs to come below $1, so some time maybe.

What are the 2 costs which is a major input to hydrogen costs? So one is renewable energy cost and second is electrolyzer cost. So we'll not be in the renewable energy. We'll have to depend on partners or joint venture partners or friends from renewable energy point of view. But we'd like to be in the electrolyzer part. So we are talking to technology partners across the globe to get into fabricating electrolyzers, whether it's alkaline, whether it's PEM, whether it's a solid upside, time will tell, but that will be in the future. We do hope to be in the EPC hydrogen. We hope to be in electrolyzers. And if there is a good opportunity with a decent return on take-or-pay contracts kind of contracts that are available, then we will also like to invest in hydrogen over a period of time.

And a grid battery is a little far away. At the moment, grid battery, storage battery costs upwards of $190 to $200. This also needs to come down because of that kind of cost, unit cost of power will work and is not possible and it's not possibly. A few experimental things have come up. But if you want to do it on the last call, it will take time. This was a plan during the planned period. If this rectifies and the battery technology is affordable and possible to do it under, say, $80 or $60, we will seriously look at it. And at the moment, any organization like ours, which is forward-looking, which wants to be where the country is growing, which is evolving always, will always want to think about future technology and bet on it. And that's what we're doing right now.

So we have put some deals of people to work on it. And if these come technologically proper and if these comes price-wise sensitive to the environment around us, we'll definitely look at investing. Now as you are aware, in all our businesses, we are #1 except the services businesses. But we are growing our services business also. And someday, we will be a top player there. We're already the #5 player. We'll hope to grow it faster. So as you can see, when we enter a new business, the idea is to dominate the business over a period of time. But today, it's too early to say anything about it. Let's see how things work out, and the idea is to be a technology player in that. And if you're a technology player, you hope to lead that business piece.

[Mohit Kumar, analyst]

Understood. Secondly, sir, how on the private CapEx, are you seeing any traction compared to a few years back. And do you expect the proportion, which is 16% of private CapEx of the order book? Do you think this will change materially over the next few years? Are we seeing any more inquiry from the private side?

[S. Subrahmanyan, executive]

So the private CapEx is also driven by the strength of the balance sheet for the private promoters. Over the last 2 years due to various reasons, especially due to commodity price increases and also due to the very good implementation of the NCLT program in India. That is the Company Law Tribunal, what you call as the Chapter 11 cases in India. You have found that many balance sheets have got repaired. Some of the balance sheets, which are very, very bad also got acquired by better balance sheets.

Now as the economy grows, I expect private capital to start getting invested. If you see the newspapers of last few weeks, you find a lot of big companies in India, a lot of big groups in India announcing major investments, whether it is in the metal industry, whether it's in the infrastructure space, whether it is in the factory space, et cetera. That means companies are reinventing themselves. The companies which are leveraged have come down on deleverage and are now thinking of possibilities of investments. So we hope to capture this space.

Second, there is an Atmanirbhar program, that is a self-reliance program, which is gaining an importance in India. It's not only policy -- stated policy of the government to look at Atmanirbhar self-reliance, but the government has also incentives, has also come up of incentives like the PLI scheme, the productivity-linked incentive schemes, by which they're encouraging companies to take advantage of the incentive schemes to increase more and more in core sectors and futuristic sectors of the economy. All this means that people will start investing in some of these sectors, and you've already seen announcement to various business groups on that.

Third, due to the Russia-Ukraine war and the way the nations look at each other, there is a possibility that India being the only clean, efficient democratic nation on this side of the earth, right, from Middle East to Far East, if you see. There is a significant advantage people are seeing by putting up investments in India. We already see it in factories and certain other scopes that we are able to look at from an overall distinctive orders' point of view. So I believe private CapEx will come back. But to define whether it is 20%, 30%, time only will tell. But there is a significant pickup in private CapEx investment in India.

[Operator]

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

[Renu Baid, analyst]

Reasonable performance. The first question is on the broad-based target for project Lakshya. If you see during the last plant period when we started, the broad-based revenue targets were 10% to 12% kind of range. And if you work backwards, the data given in the presentation for the core, the manufacturing business or LNG portfolio, the 5-year revenue growth numbers come to approximately 13%. And probably core inflows, our extra services would be similar 10% to 11% kind of range.

So the question is, when we look at the last 5-year plan, that was in the backdrop of the slowing economy, not much of CapEx happening through versus now when we look at the next 5 years, the broad-based growth outlook from infra private investments, new opportunities have been fairly strong, including exports. So is there any way that you can comment that? How do we look at the growth numbers from the perspective of being conservative or the key end market growth outlook here? That's the first question.

[S. Subrahmanyan, executive]

Renu, what I would like to tell you is in spite of COVID, in spite of Russia-Ukraine war, in spite of commodity price increases, in spite of all the disturbance that we have seen including inflation, our order inflow grew by 10%, which is a growth of 46% over the Q4 of last year. Our revenue has gone by 15%.

What it tells you is that there's a resilience in the company and thereby the economy. India is a developing nation. We need to bet on it. The government last 2 years has come out as a fantastic budget, which is aimed at propelling growth, which is aimed at fulfilling the basic needs of the common people, which is aimed at fulfilling the needs of the economy.

Moreover, the China border situation has also created an immediate sense of urgency, including the Russia-Ukraine situation that need to be more self-reliant and need to do more things in India rather than depending on external sources for our consumption or CapEx or whatever it is.

All this makes us believe there will be huge CapEx in India, which we can take advantage of. Yes, the last plan, we grew at a particular percentage. But as we have said, the next 5-year plan, we expect that percentage to continue to grow, and we hope to grow by 11% to 13% in our sales in the domestic region.

The high oil prices will also help us to sustain our growth in Middle East, which is more or less a second market. The oil being where it is, many of the countries have swelled up their sovereign funds, swelled up their economic growth and they are spending a reasonable amount of money not only towards the oil economy, but also towards solar projects and other basic industries to develop their economy.

Moreover, there is a feeling that unless you are self-reliant or Atmanirbhar your economies cannot sustain yourself because what this war has done and by sanctioning many things in Russia, et cetera, it has clearly shown that if you are an externally-dependent economy, you are in trouble. So you've got to be an internally-dependent economy for your -- not only for your self-respect but for your growth, but also for your self resilience. I think there's a great advantage for organizations like us, which are the basic infrastructure sector and economy, and we are hopeful that this will be to our advantage.

[Renu Baid, analyst]

Right. So my perspective was, shouldn't the growth rate for the core portfolio be better and higher since the environment is more favorable today than what it was 5 years back?

[S. Subrahmanyan, executive]

You're absolutely right. We, in Larsen & Toubro, believe in a very simple philosophy, undercommit and overachieve, and that's what we are trying to do.

[Renu Baid, analyst]

Okay. Got it. And secondly, if we look -- yes, especially in the last 2 months, we have seen very steep inflation impact hitting us. And part of it -- a good share of that was reflected in 4Q numbers and guidance has been broadly flat. So from a margin perspective, given the mix of orders, a, has there been some kind of provisions on the conservative side, which has come in the 4Q itself? And broadly, as a mix of orders and the new projects and the revised cost come in, shouldn't we actually look at margin improvement from a 2- to 3-year perspective?

[S. Subrahmanyan, executive]

Aren't you contradicting your own question? You're talking about inflation, you're talking about commodity prices. How can we talk about improved margin in this situation? We have to be careful. We have to be conservative. We have to give regard to what is happening in the world. There's nobody in the world who is able to predict what is going to happen. We are all praying to God the Russia-Ukraine war comes to an end. We're all praying to God that this side of the world, which is seeing turmoil right from Yemen to Middle East, to Afghanistan, to Pakistan, to Sri Lanka, to Nepal, to Myanmar, to Bangladesh have see some amount of stability.

When such a world is there and we are the only stable and decent and economically growing country in this part of the Earth, I think we have to look at the various aspects of the world and be a little conservative as to how things go. I think all predictions had to be conservative. I see things will shape up for the better. There are, I guess, wise men in the world and wise leadership across the world, including statesmen who will try to find solutions to all this. We'll take advantage of it as it comes.

[Renu Baid, analyst]

One last question, if I can ask. We have seen almost last 1.5 years of consecutive delay in finalization of multiple government orders, despite the tendering pipeline is fairly strong. So if you can help us understand. When we look at the 10% kind of growth in inflows in the next year, how would the mix of composition would government be? Lagging, declining or other segments in terms of hydrocarbon defense picking up? Any broad content in terms of...

[S. Subrahmanyan, executive]

Small change. Maybe government orders as a proportion may slightly go down. And private CapEx, as all of you have been asking, will slightly go up. Middle East would be the same. We don't expect too much change, it will be more or less the same. Maybe private orders will slightly go up. That's what I would say.

[Operator]

The next question is from the line of Ashish Shah from Centrum Broking.

[Ashish Shah, analyst]

So first question is on the private CapEx side. So just wanted to get a sense for you that if you're looking at, let's say, a new steel plant coming up or a new automobile plant coming up or oil refinery, what is the opportunity that L&T addresses? Every INR 100 [ proportioanlly ] rises. I guess it may not be a very simple thing to answer. But any comment can help us, sir.

[S. Subrahmanyan, executive]

See, we have the largest market share of whether it's hydrocarbon or a factory, whether it's a cement plant, steel plant or an automobile factory. I don't expect too many automobile plants to come up in India because every major manufacturer is already represented in India. What is happening in the automobile industry is the conversion of diesel, petrol vehicles into some EV vehicles. We just built Ola factory in Chennai. Maybe there will be 1 or 2 more factories coming up like that.

There is a huge increase in steel demand and cement demand, one, because those industries have done very well due to the commodity price increases, they're being leveraged, and there are plenty of cash flows in their hands. We do see a possibility of steel plants coming up. We do see quite a propensity for building up cement plants. The prospects are pretty good. As the economy continues to grow, I feel more steel plants and more cement plants will come up in India, and we will be in a position to take advantage of it because some of the core aspects of these plants are EPC by L&T.

[Ashish Shah, analyst]

Okay. On the process side, do we have a sizable presence on the process side of such a steel plant or a refinery? And if any percentage, any rough ballpark you can throw us, what is the opportunity for L&T can address overall from a civil point of view as well as from a process point of view?

[S. Subrahmanyan, executive]

So those are details which I'll not be answered -- which I'll not be able to answer. But as a engineering -- as the premier engineering and EPC company of India, we do have process knowledge of some of these aspects of the project. For example, cement plant, we still -- the cement companies themselves decide on one of these companies like [ Asphalt Cement 5], or [ Tyson Group ] or somebody like that or something like that as a process engineer. But the entire aspect of the detailed design and construction is handled by Larsen & Toubro, including manufacturing of some of the crucial equipment.

Today, we don't make any cement equipment because we think that we have crossed that thing a long time back, but we do source it from other companies. In a steel plant, certain aspects like coke oven or certain aspects like barn broad mill, et cetera, we do process the process knowledge and we do them. But for certain other aspects of steel plant like the blast furnace, et cetera, we do source technology from our technology partners like [indiscernible] or SMS or Primetals and companies like that. And we have very, very good understanding with all these companies.

See, it's a question of the mix and match of how it goes about, but let me assure you that we are one of the only companies in this part of the world who can put our total steel plant or a cement plant and our various aspects of the steel plant because steel plant is huge and complex. And we are very self-confident about what we can do in this space.

[Ashish Shah, analyst]

Sure. That helps. Sir, second is on the pricing -- price escalation and the inflation environment. Currently, to what extent in the domestic market the price escalation mechanisms and indices are covered? To what extent are we covering for the inflation? And what is the hit that we may end up taking on the domestic contracts?

[S. Subrahmanyan, executive]

From your matter view, you are to rest assured on the fact that 85% of the company's contracts are covered by some price escalation or basic prices or some other factors. There are about 15% to 20% of the contracts, which are not covered by price escalation, okay? This includes the metal, cement, steel or nickel or cadmium or copper or aluminium or solar modules and various other things that we buy. Now what we have done is we have analyzed the situation very thoroughly. Where we have price escalation, we're going all out for it. It is the fact that in some cases, even the price escalation formula do not totally cater to the escalation that is happening. But then there are provisions in the contract by which we can go back to the client to help us reimburse it, including first major conditions, we are using that.

In certain cases, where we do not have price escalation formula, we do take it up with the clients. We are looking at alternative designs. We are, for example, if steel prices are going up, think of using more concrete. We are looking at alternative procurement methods. For example, the price escalation is more in steel plants using pet coke. We are looking at small-scale re-rolling mills using coking coals. So various alternatives have been tried out. We're also hedging materials like copper, aluminium, iron ore, coke, et cetera, to a very large extent. So many methods are being used to reduce the impact of the price increases. But the fact remains that everything is not solvable. There will be some pressure on costs due to these price increases and escalation. And therefore, we'll have to tackle it to the cool head and evolve the situation -- and evolve solution to take care of the situation.

[Ashish Shah, analyst]

So the 85% and 15% you mentioned is for the domestic order book? The international -- I mean this is a part of the outlook, which is overseas and which may not have any explanation. So what is that percentage or the answer if you can give us?

[S. Subrahmanyan, executive]

What is that? I didn't get the question?

[Parameswaran Ramakrishnan, executive]

Could you repeat that?

[Ashish Shah, analyst]

Sir, my question is that what is the total order book, which is -- does not have any escalation consumed in the international business?

[S. Subrahmanyan, executive]

About 15%.

[Operator]

The next question is from the line of Sumit Jain from ASK Investment Managers.

[Sumit Jain, analyst]

When we look at working capital guidance that you gave, could you give guidance on core working capital? Because as the proportion of services increased, sorry, extra solutions that you gave. But as the proportion of other businesses, ex of core manufacturing increase, your working capital percentage actually improves?

[S. Subrahmanyan, executive]

See, working capital, there's nothing core and noncore, okay? Working capital is working capital. We'd like to keep it as low as possible. Whether it is IT services, whether it is manufacturing, whether it's an EPC. If we have to put our money there, it is working capital.

So we, across our businesses, try to tell our clients that we would like to work on your money. So we will do all and everything that is possible to reduce this working capital. And as the world evolves and IT becomes bigger, clients will also expect you to invest there in some form or the other. And if the EPC manufacturing goes bigger and the economy gets into inflation, there will always be problems there with immediate payments and contractual payments.

But this is something which is really monitored within the company. As you can see, we have brought our working capital to 19.9% in the last quarter and the last year. We'll continue to drive this with all efficiency. I think our Shankar Raman and team have done an efficient job there, a fantastic job there, and we'll continue to do that.

[Sumit Jain, analyst]

And with our experience of developmental projects in the past such as Hyderabad Metro, et cetera, what is the strategic imperative and thinking to a green energy BO project as a potential developmental projects in the future?

[S. Subrahmanyan, executive]

[Foreign Language] we get out of this concession business. So Hyderabad Metro is derisked, IDPL is going out, Nabha Power will move out. Now if at all, we are getting into green hydrogen, it will not be in the sense of a concession. It will be a take or pay contract, where we'll put up a green hydrogen for IOCL along with the money of IOCL and IOCL will have to pay us every month for the green hydrogen that we produce. If we cannot enforce this, we'll not get into that business. So BO or developmental projects is not a priority for us. It's totally deprioritized, and we are moving out of the sector.

[Sumit Jain, analyst]

Sure. And one last question about international project wins. In the past, we've faced issues in the higher of the cycle in hydrocarbon projects. What safeguards you've put this time around in the projects, which one believes some of them could be fixed price projects?

[S. Subrahmanyan, executive]

See, the problems that acquired were not to the fixed price item rate. Problems occurred because we got into contracts, we didn't have the right leadership team. We didn't have the right project team. And many of the projects, for whatever reason, we can keep thinking about it right now, but there's a lot of learning for the company. Was not done to time and to the speed and the technology that was requested. There was a huge learning within the company.

So the last 4, 5 years, taking from the learning, we have built a very strong team in Middle East. We have brought in process people. We have brought in engineers. We have brought in very senior project management people. We have even done some localization to help us to do projects faster. And thereby, there's a lot more confidence within the team now that we can take on $1 billion contracts and execute it to time and within the cost. So that is how project teams work and that is what we have brought on. We did some mistakes. We have learned from it. We improved our vessels on it, and we are moving on further from that.

[Operator]

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

[Deepika Mundra, analyst]

Sir, just 2 things from my side. Firstly, on the balance sheet. You mentioned about the project monetization, which has been on for a while now. In terms of the cash flow from the proceeds, outside of the CapEx initiatives you mentioned, it signals a significant amount of capital release. Is that all expected to come back to shareholders?

[S. Subrahmanyan, executive]

No. In this case, there is no capital gain. The only capital gain that we got was from the sale of the E&C business to Schneider, which has all been reflected up to last year. Now what we're trying to do is a high-cost project like Hyderabad Metro, we are trying to derisk it from the project -- from the balance sheet. So what are we doing there? We invested a lot of money, INR 20,000 crores. The traffic went down, project did not make revenue. The traffic is slowly getting back. What is the biggest concern on the project? The biggest concern on the project is a debt. So we've got a soft loan for 65 years from the government of Telangana, INR 3,000 crores, and that will help to bring down the debt.

Second, we are also talking to very serious investors who will bring in equity to the project. Thereby, we are right now 100%. We'll move around to 51%. It will become a subsidiary. The debt will also come down. The cost of interest will come down. And thereby, the project is derisked. Second, we also got the principal agreement from the government to go for an InvIT. At the right point of time when the project leave some cash flow, we'll InvIT it, and we'll see the possibility of an exit.

Second, Nabha Power, it's a running power plant with almost INR 6,000 crores of debt and profitable, it is PAT positive. What we plan to do there is move it out of our balance sheet. So we are talking to some very serious players. And as and when this occurs in a short while, we'll announce it to you.

Third is our L&T IDPL, which is our concession projects where you have 11 concessions and 1 InvIT. Here, we have already signed a term sheet with a very serious investor. We are going through the conditions precedent and certain covenants, which you need to overcome before we make the sale of IDPL. We'll do it shortly, and we'll announce that also to you. So with this, all the 3 concession businesses that we have, one is derisk and another 2 are moved out of the balance sheet. And except for L&T Finance, we become a debt-free company.

[Deepika Mundra, analyst]

Understood, sir. Just on the growth that you mentioned for the projects and manufacturing business 11% to 13%, could you guide us as to how -- do you see a significantly faster growth in international, given the commodity price cycle versus domestic over the next couple of years?

[S. Subrahmanyan, executive]

I already answered that question. I said there's not going to be any significant difference between how we grow in domestic and international. It will be the same percentage. Maybe in domestic, there could be a little more preponderance of private projects compared to government contracts, but there's no other significant difference.

[Operator]

[Operator Instructions] The next question is from the line of Bharanidhar Vijayakumar from Spark Capital.

[Bharanidhar Vijayakumar, analyst]

Could you give us a split of the funding by agencies of our current order book, for example, multilateral from center state? And what is the confidence we get from especially center and state in their plan to fund large CapEx plans like, say, last couple of years, in the next 2 to 3 years, especially in the light of inflationary pressures and their fiscal situation not going to be as great as the last 2, 3 years?

[S. Subrahmanyan, executive]

I said earlier, the bulk of our orders are still from the government sector, let's say 75%. In that central government would be 25% and balance 50-odd percentage would be state government or public sector. In the state government, state governments are negligible. It will be predominantly multilateral funding agencies like [indiscernible] World Bank and Asian Development Bank. So as you can see, our projects are dependent on multilateral funding, public sector spending, central government spending and private sector spending. We are not dependent too much on state governments, very negligible.

[Bharanidhar Vijayakumar, analyst]

Got it. And when it comes to competition, we have seen competition increase, of course, for L&T pits. And how do you see this playing out going forward? And is this also one of the reasons why margins would continue to be under pressure in the next 2 to 3 years?

[S. Subrahmanyan, executive]

Competition has been there, will continue to be there, will ever be there. I hope competition does not exist, but that is not possible to write, my friend. Including the analyst community, you have competition who ask better questions than you, have more questions than you. So that is a part of life.

Now there is a cycle of competition that happens in India. A set of competitors from Andhra Pradesh come, they are disruptive. They take jobs at any prices and they disappear over 5, 6 years and new set of competition comes. So we have looked through it over 8 decades of our competitive life. So rest assured, these kinds of things happen, and we will know how to manage it.

Now what is the strength of Larsen & Toubro? It is his engineers, it is his highly efficient project management skills, this ability to do projects on time to quality and to safety. So we will continue to stress on that. We will lose some, we'll win some. But today is a backlog of nearly INR 360,000 crores. There's no need to go hammer and tongs to win a contract. We will take contracts at our terms, at our price and the way we want it. And that's how we run this company and will continue to do so as we go forward.

[Operator]

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

[Puneet Gulati, analyst]

Can you talk a bit about what kind of capital allocation you are willing to do for Sufin and EduTech and data center completely?

[S. Subrahmanyan, executive]

Sufin, we have spent about INR 150 crores. And EduTech, we have spend about INR 125 crores, if I remember my figures. But these are developmental activities, these are platforms. As new core sales or new things get added, some more money will be spent. But right now, having done what we need to do, we are concentrating on having launched this, having gone into the market. We are looking at how to grow the market.

For example, in EduTech today, we have nearly 80,000 students already enrolled. Sufin, we are doing about INR 10 crores to INR 15 crores per month right now. So it is on the right track. It is better than we anticipated because EduTech was on high-end engineering courses Sufin was an engineering e-commerce. So that's not a normal e-commerce, it's engineering e-commerce very specific. And both are doing as well as we thought it would do at the moment. We can do better, but it's fairly very good as you see it. So let us see how it goes.

Data center, as you know, is about INR 30 crores, INR 32 crores to megawatt. What we are planning now is 230-megawatt of -- that is 60 megawatts, one data center in Chennai and one data center in [indiscernible] near Bombay. So we will see how it develops. As you are aware, in the data center space, we also signed a very specific agreement with Microsoft to be along with Microsoft to do joint marketing for sovereign cloud, public sector cloud and public sector bank cloud. So I think with this arrangement is Microsoft, one of the lead players in the cloud business Azure, we hope that this will lose traction to improve our data center returns as we push into the business.

[Puneet Gulati, analyst]

And on electrolyzers, what sort of capital allocation should we think of?

[S. Subrahmanyan, executive]

I mentioned it, my friend, it's about INR 1,000 crores for electrolyzers. The battery is a later part of the plan, so I wouldn't want to stress on it too much at the moment because they're still evolving.

[Puneet Gulati, analyst]

And the INR 1,000 crores will be a period of 5 years as you said INR 500 megawatt and then going to...

[S. Subrahmanyan, executive]

You put a plant and you start producing, so nothing more beyond that at the moment. I don't think we have the capacity to absorb more than that from an electrolyzer production point of view.

[Operator]

The next question is from the line of Atul Tiwari from Citi.

[Atul Tiwari, analyst]

Congratulations on very good set of numbers. So just one question. We had been hearing about delay finalization of awards for [indiscernible] quarters, obviously, the economy has been by and large normal. So what is your diagnosis? Why is this delay happening? Why governments are going slow on awarding orders? And what makes you hopeful that this can change next year?

[S. Subrahmanyan, executive]

First of all, I want to thank you because the only person after 1 hour who said congratulations on our stellar growth and numbers, so thank you very much for that. I hope all your colleagues are listening to it.

Now coming to investments, it is like this. When you look at the government project, let's say a bridge to be built or a road to be done, the estimates for this was done by the government, say a couple of years back based on the SOR rates that they have. Let's say it's 100.

Normally, when companies like a bid and even if we have to be L1, we bid 110, 115 to be alone. Because the rates are old, they don't reflect the latest rates. And as long as within 10% to 15% of the original budget, the government normally takes it to. Now today, because of the extraordinary increase in commodity prices, there 100 has already become 110 or 115. Now when we bid, we are going to be 120, 125.

So some of the government departments who don't have the wherewithal or decision-making, we'll tend to either rebid or rescope it but tend to negotiate much more before placing an order. That is what my colleague Shankar has said. We'll take some more time than normal to place some of the orders. It's not a general statement that all, orders are going to get delayed. Some of the orders could get delayed because of this nature of how the world is changing right now.

[Atul Tiwari, analyst]

Okay. And so now, I mean, these will have back and redo the project, EPR? Or how does it work? Because I mean if all the project EPRs to meter, then probably we are looking at a much longer time.

[S. Subrahmanyan, executive]

Clearly going back to the question. I the projects could be delayed because of the equation coming in. The governments have a method and procedure for it. they have to go back to the Board, there to go back to the departments, maybe recalibrate the budget and get back reflecting the latest -- it's not -- we don't need to do a total DPI again.

What has gone up? The price of cement has gone up, the price of steel has gone up, the price of copper has gone up, the price of aluminum has gone up. So they have to reflect the latest prices in their estimate and come back with a new budget and then take the project forward. It takes 2 to 3 months with the government organizations to do it. And some of the projects we'll encoated that, and we'll have to go through it.

[Operator]

The next question is from the line of [ Nilesh Soni ] from Papua Liladar.

[Ajinkya Bhat, analyst]

My question has been answered.

[Operator]

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

[Sumit Kishore, analyst]

P.R. in his remarks mentioned that the order prospect base for FY '23 is lower than FY '22. And in your guidance, you're talking about a 12% to 15% order inflow growth. So there is an implied improvement in the win ratio that you have versus the order prospect base. I mean could you please speak about this?

Also in fourth quarter, there seems to be a very lumpy order win, which was not disclosed on the exchanges, and that seems to be coming from the Middle East. What is the sector in which that -- what is that -- what is the qualitative description of the job and the potential size, if you could talk about that?

[S. Subrahmanyan, executive]

The lumpy order, I cannot talk about it because if I could talk about it, I would have spoken about it. The clients are still not allowed as permission to talk about it. It's a sensitive order. And as and when the clients give us permission to talk about it, we'll definitely talk about it. So please give me the discretion to take it forward in that particular manner.

Now the other question that you asked is on the prospects. The prospects, as we discussed today, is what we see as of today. We don't have the full idea with us what's going to happen after 12 months, naturally so, right? At the beginning of the year, as we see it, we see the prospects more on the same as last year. And therefore, from that, we are still prognosing an increase of 12% to 15% increase in order flow.

Let the year go by and maybe as we come across the first, second and third quarter, we will have more visibility in the geographies that we are in, the sectors that we are in, as what are the prospects. And as we don't expect to increase the guidance per se, I think it's a strip guidance to achieve such a huge order inflow from the base that we are in. But if the prospects increases, we'll definitely let you know.

[Sumit Kishore, analyst]

You also mentioned under development projects that you will go for green energy on a build-own-operate basis. And so is that just restricted to green hydrogen? Or would you also look for other opportunities in renewable as a developer?

[S. Subrahmanyan, executive]

I think I clearly mentioned it my friend, that this green opportunity only with IOCL. IOCL is the largest refiner in the country. They do have hydrogen plants, which is either gray or blue. They intend to convert many of these plants into green hydrogen. So if at all as we invest along with IOCL and renew into this green hydrogen plan subject to IRRs and calculations such on and if it is viable and the proper contract take or pay, we will do it for IOCL purposes.

Now normally in public sector, IOCL does other refineries like BPCL, HPCL will follow. These are very good companies with very good governance, and most of them are what is called a Maharatnas. So it's a good contract to have. And if that comes, it will be a take-or-pay contract with proper agreements defined there and to protect our interests. That comes, we'll take it forward. Now we do not intend to get into solar or polysilicon or any of the businesses, which I already said before.

[Operator]

Ladies and gentlemen, we take the last question for the day from the line of Nitin Arora from Axis Mutual Fund.

[Nitin Arora, analyst]

Sir, generally on the tech side, which you mentioned that the green EPC, and I'm assuming it will be a more complex job. Does margin profile really changes in this particular kind of segment for you? That's number one.

And number two, you highlighted a point that obviously, given the macro conditions of the country and globally, government would be thinking on the -- revising the project's cost and everything. Does that -- the current order book also, you see some slowness in terms of execution because of that?

Why I'm asking this question? Because in the last 2, 3 quarters, we have been more confident on the order inflow and on the execution where we were guiding that the bulk of the execution will eventually come on the core on the Q4, but it has softened a lot. I mean just 8%, 9% growth only being a very strong quarter for us. Any reading because of slowness in the order book? Or is it just generally is slow because of any supply changes, if you can throw some comment on that.

[S. Subrahmanyan, executive]

My dear friend, we have gone through a very tough season where in 24 months, we have not worked for 8 to 9 months. We normally employ 290,000, 300,000 laborers, and are about 65,000 to 70,000 people in our EPC and manufacturing business. When COVID came, all the workers went back to the towns and villages, we came down to 70,000. We remobilized to 220,000 to 230,000 laborers. Again, during COVID 2, it went back to about 150,000, 160,000. We are now again remobilize it to 280,000 to 290,000. The company has gone through great strain and effort in all these cases. And just as when we thought COVID is over, the Russia-Ukraine war has set up increase in commodity prices and supply chain disruptions across the world, including logistics. So this does affect the project business, because the steel prices are INR 79 or INR 80 per KG. We also deferred certain purchases. The clients have been popularizing us or going ahead, but we can't afford it at that price because we have quoted at some of the price and the escalation also does not scatter. So we have deliberately slowed down some of the jobs.

In spite of all this, we have had a revenue growth of 15%. The backlog that we have is stellar, very good and it is moving. And we need to pressurize on it much more to move it, and that's what we are trying to do right now. So rest assured all in every effort is being made to push the backlog towards logical conclusion of sales invoice and sales and profit thereon. But in a few selective cases, if the price increase does not cater to the escalation formula available, we will tend to defer a gross low so that we can afford these material input costs at the right prices to take it forward.

[Nitin Arora, analyst]

Sir, I respect the comment actually...

[S. Subrahmanyan, executive]

Really being done to protect investors, shareholders and analysts.

[Nitin Arora, analyst]

Why I'm asking this, sir, I absolutely respect your comment on that, but I was just wondering because you said 85% of the backlog is passed through. So [indiscernible] was coming from that angle and why to go slow when everything largely is a pass-through. But I got it.

[S. Subrahmanyan, executive]

Premium pass-through, but if a transformer from ABB does not come on time because their input costs of some copper, aluminum has gone above, this is a very big company 5x our size. Sometimes they also leverage saying you give me more money at won't supply the transfer. But I have to tell them, okay, you go to, I can't give you money and supply it 2 months later than manage my clients.

[Nitin Arora, analyst]

Got it, sir. And any respect comment on the green hydrogen EPC? Any margin profile there?

[S. Subrahmanyan, executive]

You have heard, there's no more to give.

[Operator]

I would now like to hand the conference over to Mr. P. Ramakrishnan for closing comments. Over to you, sir.

[Parameswaran Ramakrishnan, executive]

Thank you, Stephen. Thank you for your patient listening. We have to try to cover all the important points with respect to our Q4 and FY '22 performance and also provided a color of our strategic plan for up to FY '26. Thank you once for taking your time. We can now close the call. Thank you.

[S. Subrahmanyan, executive]

Thank you all. Good night.

[Operator]

Thank you. Ladies and gentlemen, on behalf of Larsen & Toubro Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.