Economy

Indian Economy

The FY 2022-23 commenced with the Indian economy facing headwinds in the form of inflationary pressures due to rising energy and food prices. Supply chain bottlenecks also remained a major constraint due to the protracted war in Europe and the accompanying global sanctions.

Despite a challenging start, the Indian economy has displayed resilience and grew 7.2% in FY 2022-23, aided by sound macroeconomic fundamentals and improved high-frequency indicators. Sustained efforts taken by the Reserve Bank of India (RBI) to rein in inflation by increasing the repo rate by 250 basis points (bps) over the past year have been reasonably successful. The Government’s continued thrust on infrastructure-driven, capex-led economic growth, together with signs of a revival of private sector investment in manufacturing and an improvement in capacity utilisation, has maintained the growth momentum.

The Government’s push for growth through larger infrastructure spends continues in FY 2023-24. The private capex continues to provide tailwinds to the growth momentum. Buoyancy in tax collections during the current fiscal year supports the capex-led growth aspirations. A healthy balance sheet of private players, improving consumer confidence and investment activity, as well as growing demand conditions, will provide support to economic growth in the near term.

It is expected that the prolonged geopolitical conflict in Europe could continue to impact supply chain dynamics and keep commodity prices volatile for a longer period. Rising interest rates across the world could also influence capital flows into the country. Finally, India, due to the structural reforms and the infrastructure-strengthening efforts of the Government and the monetary support from the RBI, is in a better position to counter the challenges and sustain its growth agenda.

Global Economy

The global economy continues to remain in a volatile state. Global growth is slowing sharply in the face of reduced investments, elevated inflation and interest rates, along with the consequent supply chain disruptions caused by Russia-Ukraine crisis.

The current geopolitical developments are leading to heightened uncertainty and most countries are experiencing a scenario of multi-decadal high inflation. Consequently, central banks across the world have resorted to synchronised monetary policy tightening. The growing polarisation amongst countries, along with fiscal / monetary imbalances, sticky inflation and a rising interest rate regime, only add to the uncertainty overhang.

Additionally, there are fresh headwinds from the banking sector in some advanced economies. OPEC+ is expected to manage the oil supplies in a manner which keeps the oil prices elevated. Uncertainty about the course of the war in Ukraine and its consequences will continue to persist in the near future.

The Middle East region is expected to maintain higher investment outlays, and besides oil, the region is also diversifying into clean energy and other industrial sectors.

In this scenario, localisation trends, possible rearrangement of the global supply chain and the consequent shift in export hubs and de-carbonisation objectives are all factors which are working in favour of India to become the world’s third-largest economy by 2030.

EPC Projects

EPC Projects focus on the proven core competencies of conceptualising, designing, executing and commissioning large, complex projects in the areas of mobility infrastructure, power transmission and distribution, power generation plants, Green Hydrogen and its derivatives, water and irrigation infrastructure, buildings and factories, oil and gas facilities, metals and mining, etc.

Hi-Tech Manufacturing

Hi-Tech Manufacturing focuses on custom-designed and built equipment catering to process plants, industrial and bulk material handling, electrolysers, advanced chemistry cell batteries, construction machinery and mining equipment, industrial valves and defence engineering, including shipbuilding.

Services

The Services businesses cater to sectors of IT (through LTIMindtree), Engineering R&D (through LTTS), Financial Services (through L&T Finance), Real Estate Development (through L&T Realty), B2B E-commerce (through L&T-SuFin), Skilling and Assessment (through L&T EduTech) and Data Centre and Cloud Services (through L&T-Cloudfiniti).

The Group’s businesses and offerings are closely linked to global megatrends

Strategic Thrust and Direction

The Group re-evaluated its Strategic Objectives in FY 2021-22, as part of the assessment done in the Lakshya 2026 exercise. These objectives illustrate how the Group creates value for its stakeholders, fulfills social obligations and meets sustainability goals. These are:

Performance in FY 2022-23 against Strategic Objectives:

Risk Management Framework

The Company has a robust risk management framework, including processes at individual businesses having dedicated risk management teams, in addition to statutorily mandated risk management committees. The Company’s risk management framework, with several levels of risk ownership, involves the identification, evaluation and management of risks. The framework appropriately manages risks at individual projects as well as at the level of the overall portfolio. Portfolio-level monitoring primarily covers aspects such as concentration risk, etc.

In addition to project-related risks, the Risk Management Framework also addresses risk mitigation procedures for functions such as Treasury, Accounts, Technology, M&A, HR, etc. Overall, risk management is integrated with business processes to ensure that risks are adequately managed, while ensuring that the regulatory and other compliance requirements are met.

1. Tactical and Strategic Risks

Several emerging market economies have faced headwinds due to the US Federal Reserve’s interest rate tightening actions as well as the continuing Russia-Ukraine war. The economic environment included currency volatility, inflation, supply chain issues and commodity price increases. Geopolitical risks remain high. While commodity prices have corrected to some extent, they still remain elevated. In developed markets, fiscal deficits continue to remain high.

Country risks are actively monitored and managed using a country-clearance framework. Counterparty risks and Sanctions risks are also monitored and managed. Business contingency plans are put in place and tested to tackle potentially adverse scenarios. Currency risks are managed actively using appropriate hedging strategies. Pegged currency exposures are also monitored proactively

• Portfolio changes

Climate change has resulted in the emergence of new business opportunities in the form of Energy Transition projects, which in turn has also led to a portfolio shift in terms of the type of projects undertaken, as well as the choice of geographies. An increase in the international Order Book has been witnessed. Other changes at the portfolio level have also occurred due to the size of projects, type of client, etc. At the Group level, the increase in the size of the IT&TS businesses implies that the Group will be more exposed to the economic conditions in developed markets.

• Talent risks

The increased focus on infrastructure spending by Central and State Governments has led to higher competition for talent. The Company has processes in place to monitor and manage its talent pool. Talent management is expected to remain a high priority for the Company to counter the risk of attrition.

• Energy Transition

The threat of climate change has pushed countries across the globe to adopt a Net Zero Path, and Energy Transition is a key element in that. In addition to this, geopolitical tensions arising out of the Russia-Ukraine crisis have brought to the fore energy security concerns and propelled the Energy Transition movement further. Stakeholder activism on ESG is also pushing corporates to pursue sustainable business operations and reduce the impact of the firm’s energy consumption.

The Company has committed to Energy Transition and Sustainability goals by setting targets to become Carbon Neutral by 2040 and Water Neutral by 2035. For reducing the impact of energy use, the Company is taking initiatives to reduce the consumption of fossil fuels by reducing the energy intensity of the businesses, switching to cleaner fuels and increasing the use of renewable energy as part of electricity consumption. The Company also views the energy transition as an opportunity for business growth. Areas like renewable energy (solar, hydel), clean energy (nuclear, natural gas), renewable fuels (green diesel), green hydrogen, battery energy storage and offshore wind present good opportunities for growth.

2. Operational Risks

The Company faces various operational risks like geological risks, climatic conditions, labour and resource availability, procurement risks, client payment terms, right-of-way, utilities shifting, clearances from various Government bodies, etc.

A risk review mechanism improves the ability to identify and manage operational risks. Risk registers are maintained and movements of risk across the life cycle of projects are tracked and managed. Various factors including resource availability, legal and taxation issues as well as financial / commercial risks are identified and mitigated at the bidding stage. In addition, the regular monitoring of projects under execution is also carried out. Guardrails and policies are laid down for aspects such as working capital management, vendor and

sub-contractor engagement, etc., and project compliances. The Company’s robust ERM system also helps in risk management. After projects are completed, close-out risk reviews are conducted.

• Natural Disasters

Historical precipitation data is analysed and factored into execution timelines at the stage of bid submission. Suitable studies of the terrain are carried out before the commencement of project execution, including soil testing, geological aspects, etc. During adverse weather conditions, equipment is protected by tying down or anchoring down (in case of barges).

Seismic impact on the business is evaluated and its mitigation through earthquake-resistant design is adhered to as a part of the risk review. A vigilant project execution culture ensures fast and safe de-mobilisation of manpower and machinery in case of a natural calamity. Insurance is also utilised prudently to manage these risks.

• Climate Risk

The impact of global warming and climate change is being seen in a higher frequency of extreme weather events like heat waves and changes in weather patterns. The Company’s primary business activities are related to the construction and manufacturing sectors, which may get negatively influenced by climate change. Some of the major concerns are:

1. Actual weather conditions experienced at project sites / manufacturing facilities may be significantly different from historical or predicted meteorological data and impact the preparedness of the business.
2. Climate change, being a risk multiplier, has exacerbated the instances of extreme weather events / natural calamities which cause significant difficulties in resource productivity, transportation of equipment and materials, and safe operations.
3. Extremely high daytime temperatures pose a danger to the health and safety of workmen and employees, and impact their productivity.
4. Heavy precipitation or flooding poses significant risks to operations and the movement of plants and machinery.
5. In addition to the loss of productivity and threat to safety, climate events pose an additional burden in terms of higher contingencies and insurance costs.

• vi.Resource scarcity and the consequent impact on costs, e.g., availability of water for business operations.
• vii.Higher costs in the form of carbon taxes and compliance costs, e.g., CBAM, SFDR.

The Company adheres to all environmental and safety compliances including ISO 14001 and ISO 45001. Occupational hazard mitigation measures and adherence to an environmental management plan are carefully monitored at all project sites and manufacturing locations. Assessment of high precipitation / flooding periods is done at the bidding stage for EPC projects and it is factored into the project execution plan to avoid heavy or at-risk work during those periods.

Monsoon preparedness plans are a standard requirement now for all projects and cover plans for the protection of equipment (covering, tying down or other suitable arrangements), back-up for power / fuel, human safety, and plans for restoring normal operations like de-watering arrangements.

For dealing with periods of extremely high temperature, measures are taken to reschedule the work-rest cycle, adopt additional measures for shelters and ensure hydration of the workforce, conduct awareness sessions and issue regular advisories to apprise the workforce of risks, reporting issues and measures to be taken. To de-risk the movement of equipment in difficult environmental conditions, appropriate arrangements (route assessment, ground reinforcement, special support team, etc.) are made in advance.

Initial risk assessment and regular risk reviews aim to anticipate the impact of climate risks and devise solutions to avoid / mitigate the risks.

• Cyber security

There is a Cyber Security Assurance Framework under which cyber preparedness is regularly monitored. The Chief Information Security Officer is responsible for company-wide cyber security related issues. Regular updates are provided to the Risk Management Committee and processes and policies are fine-tuned as required.

• Other risks

Risks to the Company’s businesses can arise from changes in technologies, evolution in business models as well as intensified competition. Apart from the above, unforeseen tail risks (e.g., the COVID-19 pandemic) will continue to emerge as additional challenges. While the

Company has processes in place to track and manage these aspects suitably, residual risks will remain to be dealt with on an ongoing basis.

3. Financial Risks

Financial risk management is governed by the Risk Management Framework and Policy approved by the Company’s Audit Committee and authorised by the Board. Financial risks in each business portfolio are centrally measured and managed by the Corporate Treasury.

FY 2022-23 was a year of continued recovery from the pandemic aided by concerted vaccination efforts. While the economy did open up, the ongoing Russia-Ukraine conflict impacted commodity prices adversely. Elevated oil prices widened the trade deficit putting pressure on the USD-INR exchange rate. Most of this pressure was absorbed by India’s foreign exchange reserves, which shrunk by about USD 70 billion.

In India, full recovery in urban services, strong urban job growth and steady improvement in real rural wages should see greater participation from lower-income households in FY 2023-24. Well-capitalised Indian banks with lower NPAs should be able to withstand the collateral stress, if any, emanating from the banking sector turmoil in some of the developed economies in the West. Indian banks’ credit is expected to grow steadily at 12-13% backed by a robust deposit growth of about 10-11%.

Inflation is expected to stabilise at around 5%, assisted by improvement in domestic food supply and a fall in global commodity prices. However, strengthening domestic demand could keep inflation elevated in the services sector. Meanwhile, correction in commodity prices and robust services exports are likely to contain the Current Account Deficit (CAD) in FY 2023-24, allowing the Government to exercise fiscal prudence and at the same time, pursue a capex-driven long-term growth path for India. Some green shoots in private investment are visible. However, developments with respect to the global economy and conditions prevailing in the domestic economy in terms of inflation and liquidity scenario will determine the momentum of private capex.

The slowing trajectory of inflation and improving CAD position would also allow the RBI to take a pause from

further rate hikes during FY 2023-24, with a possibility of rate cuts, maybe towards the end of the financial year.

As for the global markets, the years 2020 and 2021 witnessed the central banks providing an economic safety net with ultra-accommodative monetary policies, primarily to negate the aftermath of the COVID-19 pandemic. The year 2022 was all about central banks starting to aggressively pull that safety net away, to combat the rising inflation across all commodity classes, exacerbated by the Russia-Ukraine conflict. The year 2023 will likely see all the major central banks taking a pause on interest rate hikes as the urge to control inflation may lead to recessionary conditions across most developed economies.

Looking ahead, we expect financial market volatility to remain elevated as risks still continue to persist and global financial conditions remain tight. This is likely to create continued headwinds to growth and, by extension, risk assets.

The recent developments in the banking sector in both the US and Europe have raised questions on the resilience of the banking system of the developed world. This has also increased the fear of contagion in other smaller regional banks and less regulated non-banking sectors like Private Equity and Hedge Funds having significant exposure to sectors like commercial real estate.

China could witness decent growth momentum in the first half of the year 2023 due to the pent-up demand emanating from the post-COVID reopening. In the second half of the year, the growth could moderate because of lower investments, sluggish domestic demand and a possible global slowdown.

• Foreign Exchange and Commodity Price Risks

The businesses of the Company are exposed to fluctuations in foreign exchange rates and commodity prices. Additionally, it has exposures to foreign currency-denominated financial assets and liabilities. Foreign exchange risk on revenues, costs, assets and liabilities are managed through forwards and options wherein the counterparties are regulated banking entities. The financial risks involving commodity prices are managed through price variation clauses embedded in customer contracts, hedges in financial markets and pass-through price arrangements. In the case of contracts with price variation clauses, the Company runs a basis risk in terms

of revenues tied to various price indices versus actual prices. For FY 2022–23, commodity prices have softened from the peak levels of March 2022. With global growth expected to moderate in the year 2023, the Company expects base metal prices to be range-bound. Supply chain imbalances due to geopolitical issues continue to pose a risk, thereby leading to higher volatility.

The disclosure of commodity exposures as required under clause 9(n) of Part C of Schedule V of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 in the format specified vide SEBI Circular dated November 15, 2018, is given below:

• Liquidity and Interest Rate Risks

The Company constantly monitors the liquidity levels, economic and capital market conditions and maintains access to the lowest cost sources of liquidity through a combination of approved banking lines, trade finance and capital markets. The Company judiciously deploys its surplus funds in short-term investments, in line with the Board-approved Treasury Policy. During FY 2022-23, the Company managed its higher than usual treasury investments to generate investment returns, to partly neutralise the higher interest cost due to borrowings raised in the previous year 2021-22. The Company dynamically manages interest rate risks through a mix of fund-raising, investment products and derivatives across maturity profiles and currencies within the robust Risk Management Framework.

Financial Resources and Capital Allocation

The capital allocation philosophy of the Company is geared to support business initiatives for the profitable growth of the Company, while retaining enough liquidity to support any sudden short-term requirements of the Group.

After facing uncertainties in FY 2021-22 in terms of liquidity and supply chain disruptions, the Company continued to face an uncertain economic environment at the beginning of FY 2022-23, given the Russia-Ukraine war. The Company raised a significant amount of long-term liquidity in FY 2020-21. The comfortable liquidity reserve on the balance sheet was also carried forward to FY 2022-23, given the lingering

uncertainty. The Company provided financial support to Group companies like L&T Metro Rail Hyderabad Ltd., while they were recovering from the impact of the COVID-19 pandemic. The Company also supported the capital expenditure required to execute some of the large projects awarded in the previous years. Going forward, apart from regular capital expenditure, the Company plans to invest in select new businesses of green energy and data centers and continue to focus on growing its services businesses.

As a result of the improved collection efficiency in businesses, the Company ended the FY 2022-23 with a reduction in the debt levels to ₹ 18,151 crore vis-à-vis ₹ 20,298 crore in the previous year, at the standalone entity level. The Company proposes to raise long-term debt in FY 2023-24, to refinance almost ₹ 4,500 crore of maturing debt and to fund its proposed capital expenditure. Low gearing levels (Gross Debt to Equity ratio at 0.25x) and a healthy cash balance at about ₹ 24,300 crore equip the Company to deal with normal business uncertainties. Given the recovery in financial markets post-COVID, improved collection efficiency in the Company’s businesses and the healthy balance sheet position of Indian banks, the Company may decide to lower the cash reserves on the balance sheet from the current levels in FY 2023-24.

With the implementation of the Large Exposure Framework guidelines of RBI from April 1, 2019, the banking limits sanctioned by domestic banks to any of the Group businesses will need to fit within 25% of the Tier 1 capital of banks, versus 40% of Tier 1 and Tier 2 capital prevalent earlier. As of now, the Company has adequate banking facilities to cater to the business requirements.

The Company is seeing a significant volume of large-value contracts in the Middle East, especially from Saudi Arabia, which will require large banking facility tie-ups locally. The Company expects to tie up the required banking facilities during the year to address the upcoming project requirements.

Internal Controls and Safeguards

The Company has adopted the globally accepted framework issued by the Committee of Sponsoring Organisations (COSO) of the Treadway Commission for Internal Controls. This framework provides for Internal Controls to be commensurate with the nature, size and complexity of the business, both at the entity level and process level and assists the Company in achieving predictable and desired outcomes. The internal controls are aligned with the

strategy of the Company, dynamics of constant challenges and the resultant evolving business needs. The Company’s internal controls framework ensures integrity in conducting its business, safeguarding its assets, timely preparation of reliable financial information, accuracy and completeness in maintaining accounting records and prevention and detection of frauds and errors monitored through a set of detailed policies and procedures.

Employees of the Company are guided by the ‘Code of Conduct’ that reflects and reinforces the culture and value system. A separate ‘Code of Conduct’ has to be confirmed by the suppliers at the time of the registration process to ensure that they align with the Company’s commitment to pursue sustainable growth by integrating Environment, Social and Governance (ESG) principles with their businesses. The Board of Directors and Management at all levels exhibit the right tone through their actions, behaviour and directives. The ‘Code of Conduct’ and the ‘Whistle-blower / Vigil Mechanism’ policies are available to both employees and business partners to empower them to raise genuine concerns about any actual or suspected ethical / legal violations or misconduct or fraud, with adequate safeguards against victimisation, fear of punishment or unfair treatment.

The Internal Financial Controls (IFC) system operates at the entity and process levels and is aligned with the requirements of the Companies Act, 2013 and the globally accepted framework issued by COSO. The primary responsibility for establishing, operating and upgrading the Internal Controls System is on the executive management, who are assisted by Internal Control teams operating at corporate and individual business levels. The teams formulate and upgrade the processes and standard operating procedures on an ongoing basis and share best practices across the organisation.

The Corporate Audit Services Department undertakes the testing of internal controls (design as well as operating effectiveness) and follow-up for remedial actions where controls require strengthening. The Audit Committee guides and evaluates the efficacy of the Corporate Audit function and reviews the major audit observations regularly during the year. The operating effectiveness of IFC is carried out by the Corporate Audit Services team and the Internal Controls over Financial Reporting (ICoFR) by the Statutory Auditor, and no reportable material weaknesses, either in their design or operations, were observed. The evaluation included documentation review, enquiries, testing and other procedures considered to be appropriate in the circumstances.

MDA Annexure