L&T's order book is booming. Is the valuation already pricing it in? | Stock Market News

Engineering giant Larsen & Toubro (L&T) had already warned investors to expect a soft first half of FY27 as supply-chain disruptions stemming from the West Asia conflict weighed on project execution. Against that backdrop, weak April-June quarter (Q1FY27) results were hardly a surprise. The stock nevertheless rose about 3% on Wednesday, buoyed by management's assurance that the Q1 shortfall can be recovered over the rest of the year as project execution accelerates.

Revenue in L&T's core engineering business—projects, products and manufacturing—rose just 2% year-on-year to ₹46,191 crore in Q1, while Ebitda margin shrank by 20 basis points to 7%. To meet its FY27 guidance of 10-12% revenue growth and a 7.8% Ebitda margin in the core engineering business, project execution will need to gather pace meaningfully over the coming quarters.

Profitability was hurt not only by slower execution but also by an expected credit loss provision of about ₹250 crore, linked to water and select infrastructure projects. Management expects to recover time- and cost-overrun claims from clients over time. If customers accept cost escalations, L&T may ultimately avoid bearing these costs.

Order inflows remain the bright spot. With core business orders rising 16% year-on-year to ₹86,400 crore in Q1 and the order book expanding 27% to ₹7.5 trillion, L&T appears on track to exceed its FY27 order inflow growth guidance of 10-12%. L&T has also recently secured a ₹15,000 crore offshore wind power order from Europe, reinforcing confidence in its order inflow outlook.

The company's opportunity pipeline stood at about ₹15 trillion at the end of June, split almost evenly between domestic and international markets. Management said the pipeline remains robust and expects project awards in West Asia to pick up from the second quarter.

If the company achieves the midpoint of its historical 20-25% success rate—around 22%—it could secure an estimated ₹3.3 trillion of fresh orders from this pipeline. Combined with Q1 order inflows, core business order inflows could exceed ₹4 trillion in FY27, suggesting the company may outperform its 10-12% order growth guidance.

The bigger question for investors, however, is whether those robust order inflows and the improving execution outlook are already reflected in the stock price.

The value of L&T’s stake in L&T Finance, LTM, L&T Technology Services (based on their respective current market capitalizations and after applying 20% holding company discount), needs to be deducted from L&T’s market capitalization to arrive at the value of core engineering business. Based on this, L&T’s net market capitalization comes to ₹3.9 trillion.

Nuvama Institutional Equities expects core engineering net profit for FY28 at almost ₹17,200 crore, which means the business is being valued at an implied price-to-earnings multiple of 23x for FY28 estimates.

That valuation already looks demanding given management's FY27 guidance of 10-12% revenue growth—steady rather than exceptional growth—and an Ebitda margin projection of 7.8% which is flat year-on-year.

Note that L&T is not directly comparable with companies such as ABB, whose significantly higher margins are supported by a more technology-led business mix.

With limited scope for expansion in valuation multiple, L&T’s investors should expect the stock price to move in tandem with earnings growth rather than any expansion in valuation multiples. Nuvama has a target price of ₹4,065 even after assuming 10% expansion in valuation multiple from 23x to 25x, indicating limited upside from the current market price of about ₹3,940.

Manish Joshi is a chartered accountant (passed in first attempt) with experience of capital markets spanning equities, derivatives, investment banking and private equity in various roles ranging from analyst to fund manager/trader. Previously, he worked with BNP Paribas, Karvy Stock Broking and The Financial Express. This rich experience has further helped him improve analytical skills and understanding of various businesses. At Mint, he writes on topics across sectors.<br><br>Over the last two years of his association with Mint, he has focused on sharing his knowledge accumulated over the years with the readers. Having deep knowledge of accounting standards by virtue of the highest qualification in accounting, he can evaluate corporate balance sheets better. He tries to give a differentiated perspective on valuation of stocks and corporate developments backed by sound logic.<br><br>His goal is to provide a unique value proposition to readers by blending fundamental views on a stock with shifting market dynamics, which is possible because he is an active trader himself. His columns are useful for investors and students who are pursuing management courses by demystifying complex concepts and analytical jargon. His mantra is to give maximum value for the money and time spent by the reader.

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