New segments like defence and data centres to drive growth for L&T

Reports state the Telangana state government is to takeover the asset at around Rs 2,000 crore equity valuation

The exit of Larsen & Toubro (L&T) from the Hyderabad Metro is a long-term positive for the stock. It could be a bullish trigger, alongside higher international orders, and new opportunities in segments like defence and data centres.  

 

The Telangana state government will reportedly take over the asset at around ₹2,000 crore equity valuation. A state government press note suggests it will take over ₹12,730 crore of the special purpose vehicle’s debt and offer a one-time settlement of ₹2,000 crore for L&T’s equity investment (L&T’s total equity invested was ₹5,900 crore).

 

The FY25 profit before tax (PBT) loss at the Metro was ₹626 crore (including ₹187 crore in real estate monetisation gains). These losses are 3 per cent of L&T consolidated PBT and 4 per cent of consolidated net profit for FY25. It could lead to 4 per cent earnings per share accretion, plus potential income on the ₹2,000 crore in cash. 

 

The Metro contributed ₹600 crore to the financial year 2025 operating profit, which is 2 per cent of overall consolidated operating profit of ₹26,400 crore. Interest expenses of ₹940 crore in FY25 will not be incurred in FY26. The exit plus potential accrual of income may boost return on equity (RoE) by 60-70 basis points leading to 18 per cent RoE or better for FY26 (Q1FY26 RoE was 17.0 per cent).

 

L&T is focusing on four new businesses which were seeded during ‘Project Lakshya 2026’ —  real estate, semiconductor, green energy and data centres. It had an order book of ₹6.1 trillion as of Q1FY26. Core engineering, procurement and construction (EPC) revenue growth over recent fiscals was driven by international orders, and the trend may continue, compensating for slower domestic growth.

 

The prospect pipeline for H2FY26 is ₹15 trillion, and includes domestic projects across thermal, nuclear, hydroelectric, renewable, urban infra, buildings and factories, state irrigation projects and gas, and maintenance capex of oil fields abroad. L&T has a win rate of 18-20 per cent in the prospect pipeline, implying target inflows of ₹3-3.2 trillion. Its win rate in thermal power projects is higher, given its a two-player market. The win rate in defence is also high.

 

Recent order inflows of ₹23,000 crore in thermal from Adani, a nuclear order from Nuclear Power Corporation of India Limited, and other large orders in power transmission and distribution (T&D), heavy civil, high speed rail, renewables among others indicate domestic momentum. While, international inflows come from oil & gas and power.

 

L&T’s defence vertical has a prospect pipeline of ₹21,500 crore with a focus on naval systems, weapon systems, engineering and ground systems, sensors and communications. The company has entered into a strategic partnership with Bharat Electronics to respond to the express of interest issued for advanced medium combat aircraft projects. Between FY23 and FY25, L&T’s defence order inflows exceeded ₹10,000 crore every fiscal and defence revenue annually ran at 36 per cent, indicating really strong growth.

 

Future focus areas may include real estate, where it is looking at tier-I cities with land acquisitions and joint development projects. It has 75 million square feet under development and targets a ratio of 25 per cent for the commercial segment and 75 per cent for residential.

 

In green hydrogen, L&T Energy GreenTech (LTEG) has secured a major order from Indian Oil Corporation to set up a green hydrogen plant at Panipat, with a capacity of 10,000 TPA. The firm is also looking to expand electrolyser manufacturing capacity at Hazira to 1 Gw (current capacity is 400 Mw). It has partnered with Japan’s ITOCHU to develop a 300 Ktpa green ammonia project at Kandla and plans for a larger 1.8 Mtpa facility at Paradip. L&T is also designing analog semiconductors for industrial applications and it has bought 100 per cent of SiliConch Systems to strengthen its presence in fabless semiconductors. In data centres, L&T has a stake in E2E Networks. It has commissioned 32 Mw of data centre capacity and aims to scale up to 100 Mw.

 

The EPC order flow could be at an annual rate of 11 per cent over FY25-28 with mid-teens growth in revenues. Given strong growth in new segments, this should push net profit growth over 20 per cent during the period. Risks include order slowdowns, geopolitical issues, delays in completion, rising commodity prices, increase in working capital and increased competition.