Extended Iran conflict may disrupt L&T's order inflows, regional projects

With nearly half its order book linked to the Middle East, L&T may see short-term disruptions from the Iran conflict, raising concerns over execution, exports and regional project pipelines

While investors would focus on the results and guidance for the third quarter of financial year 2025-26 (Q3FY26) in the normal course of business, the US-Israeli attack on Iran and the latter’s retaliation at Gulf allies of the US has forced them to weigh the consequences of the event. Investors have long been apprehensive about such a possibility but the reality is still to be discounted by markets.

 

Energy supplies will be disrupted if there’s a blockade of the Straits of Hormuz and Houthi action in the Red Sea. Key shipping routes in the Red Sea and Persian Gulf may be shut for indeterminate periods. The Gulf Cooperation Council (GCC) airspace is shut at the moment with uncertain timelines. Crude oil and gas prices have spiked, and global trade could be disrupted. Freight rates and insurance premiums are climbing.

 

India is a massive energy importer with a big diaspora across West Asia. Listed Indian companies have big exposures across various nations in the region. Apart from short-term disruptions and possible war damage, there could be a slowdown in real estate markets due to sentiment being affected.

 

Larsen and Toubro (L&T), for example, derives 50 per cent of its Q3FY26 order book and over 40 per cent of revenue from the region, suggesting likely near-term issues. Longer-term impact is hard to ascertain since that would depend on the length and intensity of the conflict. Other engineering firms like KEC International and Kalpataru Projects International Ltd (KPIL) also have big regional exposures as does Cummins India, Thermax, and AIA Engineering.

 

Over the first nine months of 2025-26 (M9FY26), L&T has derived 37 per cent of its ₹7.33 trillion order book from the region, with order inflows of ₹3.46 trillion. It is a dominant contractor in hydrocarbon projects, with operations along the Persian Gulf in East Saudi Arabia.

 

KEC International’s overall order book of ₹36,700 crore has 20 per cent contribution from this region while it contributed 28 per cent share of the M9FY26 order inflows of ₹21,300 crore. KPIL has 11 per cent regional contribution to its order book of ₹63,300 crore across M9FY26.

 

Freight disruptions may hurt AIA Engineering’s exports, which contribute 65 per cent of revenue with 6.6 per cent direct exposure to the region. Exports of Cummins India and Thermax, too, could also be adversely impacted. Cummins India has 17 per cent exports share in revenues in FY25, down from 26-27 per cent in FY23, with direct exposure to West Asia and also to Europe where the route may be disrupted. Thermax had 39 per cent of M9FY26 order inflows from exports and the exposure to the UAE includes a large industrial infra contract with Abu Dhabi National Oil Company.

 

In Q3FY26, L&T reported a small miss on revenues while operating profit margin was above consensus, and working capital management continued to improve. The order inflow continued, including orders from West Asia and a maiden order for an offshore wind project from Europe. It retained guidance on most metrics.

 

L&T reported 18 per cent year-on-year (Y-o-Y) growth in core engineering and construction (E&C) ordering in Q3FY26 despite a high base. Consolidated recurring net profit at ₹4,408 crore grew by 31 per cent Y-o-Y. The order book is ₹7.33 trillion, up 30 per cent Y-o-Y. The management is confident of guidance of 15 per cent Y-o-Y revenue growth for FY26. The full-year operating profit margin target was at 8.5 per cent. The net working capital guidance was moved to 10 per cent of sales from 12 per cent of sales earlier.

 

The 11 per cent Y-o-Y growth in core revenues and 19 per cent Y-o-Y growth in core operating profit in Q3FY26 both marginally missed consensus. The boost, however, came from real estate bookings, which may be lumpy and not consistently sustainable.

 

L&T’s prospect pipeline for Q4FY26 was estimated at ₹5.9 trillion, up 7 per cent Y-o-Y, spread across infrastructure at ₹4.02 trillion (₹4 trillion in Q4FY25), hydrocarbon at ₹1.26 trillion (₹1.44 trillion), carbon at ₹0.4 trillion (₹0.01 trillion), and Hi-tech at ₹0.42 trillion (₹0.07 trillion last year). This was prior to the conflict. Despite the conflict and the almost certain miss of Q4FY26 targets, some analysts are holding firm on L&T and other engineering stocks with exposure to West Asia. The sharp selloffs in the last session may provide an entry point if the conflict is quickly resolved.