Outperformance prompts funds to explore defence exemption for L&T

Funds may consider an exemption on defence-related Environmental, Social, and Governance (ESG) concerns for Larsen & Toubro (L&T), said analysts with Jefferies. The expectation is over L&T’s stock outperformance and India’s capital expenditure up-cycle.

“India's capex up-cycle and L&T’s 35 per cent outperformance to Nifty year-to-date (YTD) has prompted funds to check if an exemption can be made on the defence concern for owning the stock,” analysts with Jefferies noted in a report named 'Revisiting the ESG Concern' dated November 27.

The report further added that the management continues its proactive discussions with ESG agencies on the defence exposure. An email query sent to L&T on Tuesday did not receive any immediate response. Jefferies in its note said international ESG rating agencies have raised red flags on L&T’s work in nuclear and cluster munition areas through defence projects.

“L&T’s published FY23 annual report clearly states that the business does not manufacture any explosives or ammunition of any kind, including cluster munitions, anti-personnel landmines, nuclear weapons or components for such munitions.”

Jefferies further stated L&T’s defence revenues are 2 per cent of overall consolidated financials and 3 per cent of its Engineering & Construction (E&C) business. EBITDA is 3 per cent of overall and 6 per cent of E&C. “Sustainably, we do not foresee defence becoming more meaningful as capex in power and industrial, especially, are on an upswing,” the analysts said.

L&T has been on an order-win spree, with new orders worth more than Rs 45,000 crore, in the ongoing quarter starting October. The company reported new orders worth Rs 89,153 crore in the September-23 ended quarter (Q2FY24), a quarterly record high, according to the company’s presentation. As of September 2023, L&T had an outstanding order book of Rs 4.50 trillion.

L&T's ESG performance
Parameter	FY23	FY26E Target
40% emission intensity reduction (TCO 2 e/ bn INR Revenue)	889	543
Consumption from Renewables ( as a % of energy)	10	50
Green portfolio (Proportion (%) of revenue)	37	40
Gender diversity (Women as % of workforce)	7.1	10
Source: Jefferies