Strong domestic orders, non-core divestments may drive rerating for L&T

Larsen & Toubro (L&T) reported a miss on revenue for Q2FY26. Order inflows were higher than consensus, with growth guidance for orders upgraded. The growth guidance of 15 per cent year-on-year (Y-o-Y) for group revenues and 8.5 per cent operating profit margin for the core business in FY26 was maintained.

 

The consolidated Q2FY26 net profit was in line, though revenue guidance was missed due to lower-than-expected revenue from core engineering, procurement and construction (EPC). Order inflows for the core EPC business stood at Rs 96,800 crore, and the operating profit margin improved by 20 basis points Y-o-Y. Net working capital and return on equity (RoE) continued to improve.

 

The order prospect pipeline is up 29 per cent Y-o-Y at Rs 10.4 trillion for the remaining six months of FY26, and the company has a win ratio of 19–20 per cent in Q2FY26 order wins. L&T may easily exceed its previous order inflow growth guidance of 10 per cent. Management has now guided for order inflow growth well over 10 per cent.

 

L&T has an in-principle understanding with the government of Telangana to divest its stake in Hyderabad Metro. A revival in domestic order inflows and non-core asset divestments could lead to valuation rerating of the stock.

 

Consolidated revenue grew 10 per cent Y-o-Y to Rs 68,000 crore, while operating profit rose 7 per cent Y-o-Y to Rs 6,800 crore for Q2FY26. Margin was down Y-o-Y at 10 per cent. Net profit rose 16 per cent Y-o-Y to Rs 3,900 crore. For core EPC, revenue was Rs 49,000 crore (up 10 per cent Y-o-Y) due to weaker domestic execution, as progress in water projects was slow.  International execution increased 24 per cent Y-o-Y. Overseas operating profit growth stood at 16 per cent Y-o-Y, while operating profit margin expanded 20 basis points Y-o-Y to 7.8 per cent. The net working capital (NWC)-to-sales ratio stood at 10.2 per cent, and RoE improved to 17.2 per cent.

 

Consolidated order inflow increased 45 per cent Y-o-Y to Rs 1.2 trillion. Core EPC order inflow grew 54 per cent Y-o-Y to Rs 96,800 crore, driven by both domestic (up 41 per cent Y-o-Y) and international (up 62 per cent Y-o-Y) markets. The core order book grew 30 per cent Y-o-Y to Rs 6.7 trillion.

 

The international book accounts for 49 per cent of the total order book, of which 84 per cent is from the Middle East. L&T has projects across Saudi Arabia, Kuwait, Qatar, and the UAE, driven by renewables and gas-to-power projects. In Q2, the company secured multiple large EPC orders in Saudi Arabia and the UAE.

 

Over the next two to three years, the management sees opportunities of 10–15 GW in thermal power projects, along with opportunities in nuclear and hydropower, inflows from real estate, transportation infrastructure, metals and mining, and defence. L&T is going slow on water projects on account of payment delays. Water currently forms 7 per cent of the order book.

 

The company plans to complete the divestment of its stake in Hyderabad Metro by Q4FY26. The entire debt of Rs 13,000 crore of Hyderabad Metro would be taken over by a special purpose vehicle (SPV) floated by the Telangana government. L&T will receive equity of Rs 2,000 crore (versus adjusted equity of Rs 1,000 crore, which comprises Rs 7,500 crore of actual equity adjusted down with accumulated losses of Rs 6,500 crore in the Metro). The divestment would reduce debt and interest burden.

 

Under its Lakshya 2031 roadmap, L&T sees electronics manufacturing, renewable energy, and semiconductors as key growth areas. In renewables, it has a memorandum of understanding (MoU) with Itochu Corporation (Japan) for a 300 ktpa green ammonia project at Kandla, Gujarat. It is executing EPC work for the Yanbu Green Ammonia project in Saudi Arabia. In semiconductors, subsidiary L&T Semiconductor Technologies has acquired design assets and intellectual property (IP) from Fujitsu General Electronics, and is partnering with the Indian Institute of Science (IISc), Bengaluru, to establish a national innovation hub for research.

 

L&T has formed a consortium with Bharat Electronics (BEL) for the Advanced Medium Combat Aircraft (AMCA) programme of the Indian Air Force. The scope of work includes development of the prototype airframe, system integration, and flight certification for the next-generation stealth fighter. Shortlisting of bidders is expected by Q3FY26, followed by the issue of the request for proposal (RFP) in Q4FY26, and award of the prototype contract by Q4FY27.

 

Consensus remains bullish on L&T despite the revenue miss, as the long-term prospects look solid and the order book guarantees revenue visibility.