The Street cheered Larsen & Toubro Ltd’s (L&T) FY25 with the stock closing 3.6% higher on Friday at ₹3,444 on the National Stock Exchange. The rise stands out as equity markets were reeling under pressure amid India-Pakistan tensions. The stock’s positive reaction can be attributed to L&T exceeding core engineering and construction (E&C) FY25 order inflow and revenue growth guidance of 10% and 15%, respectively. E&C order inflow grew by 20% in FY25 and revenue by 19%.
The moot question now is: Can there be a positive surprise in FY26, too? That’s quite likely for order inflows, as management seems to be in an ‘under-promise’ and ‘over-deliver’ mode, at least based on the inference drawn from L&T’s FY26 guidance and prospective order pipeline.
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The company believes that there could be a prospective pipeline of ₹19 trillion for FY26, a big jump from ₹12 trillion at the start of FY25. In the past, the company has seen a 20-25% success rate in winning prospective projects, and the management expects to better this rate. Even if L&T manages to achieve the midpoint of the 20-25% success rate, i.e. 22%, the company is looking at having an order inflow of ₹4.2 trillion in FY26. This is far higher than the order inflow guidance of ₹3.96 trillion, representing a 10% growth over FY25. Note that the order inflow-to-prospective pipeline at the start of the year rate has been at nearly 25% for FY24 and FY25.
Order execution rate
While order inflow is likely to be robust, the management guidance of 15% revenue growth for FY26 would depend on the execution rate. Note that there could be execution challenges in domestic and global markets with geopolitical tensions on the rise and potential problems in the global supply chain due to tariff-related uncertainties. A good 54% of L&T’s order book is from India, and the rest is from overseas. Nearly 80% of the overseas order book is from the Gulf countries. And almost 80% of the domestic order book is from the central/state government or government-owned entities, which could lead to a lower execution rate.
Meanwhile, management expects the E&C business Ebitda margin to move up to 8.5% in FY26 from 8.3% in FY25. This is even though fixed-price international orders, which have lower margins, are to be executed. The caveat for the margin guidance is that commodity prices should not play spoilsport.
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One incremental negative in terms of guidance for FY26 is marginally higher net working capital-to-sales for the E&C business. The measure was 11% in FY25 against 12% in FY24 as collections from customers were faster. In fact, adjusted for water projects that are mainly from government bodies, net working capital (NWC) was 8-9%. L&T expects overall NWC at 12% for FY26. The business delivered RoAE (return on average equity) of 16.3% in FY25 (14.9% in FY24), the highest in the last eight financial years, partially aided by the drop in NWC.
Results duration
L&T’s March quarter performance of core E&C was robust—revenue increased 11.6% year-on-year to ₹56,873 crore, and Ebitda margin was up 40 basis points to 9.9%.
However, a company engaged in engineering projects should be evaluated based on longer-duration results, such as annual rather than quarterly, as revenue is recognized using a percentage completion method after crossing a certain threshold.
The stock has been in consolidation mode for the past year with just a 5% gain. After the FY25 results, most brokerages have maintained their positive view on L&T, citing the company’s strong order book and proven execution capabilities. The Bloomberg consensus price target is ₹3,922. Excluding valuation of subsidiaries at about ₹1,000 per share, the core E&C business is being valued at 25x of FY27 earnings per share based on PL Capital’s estimates. For long-term investors, L&T’s strategic expansion into emerging sectors like semiconductors, data centres, and green hydrogen holds promise.
