---
endpoint: analytics
pattern: Conglomerates
status: done
latency_ms: 165992
conversation_id: 58a33bf4-c7fb-4f3b-beaf-b207b7b13ae3
citations: 8
created: 2026-05-31 21:23:40Z
---

# What are the key risks to Larsen & Toubro’s growth trajectory?

# Key Risks to Larsen & Toubro's Growth Trajectory

L&T (NSE: 500510; CLSA-rated O-PF) is structurally levered to the India and Middle East capex cycles, with diversified exposure across infrastructure, hydrocarbons, power T&D, renewables, defence, IT services and financial services. While momentum into FY26 is strong (FY25 E&C order inflows +20% YoY vs 10% guidance; FY26 prospects pipeline guided at US$221bn / +57% YoY [2]), CLSA's own coverage flags a layered set of risks to the bull case. Below is a synthesis of internal CLSA research on the key downside drivers.

---

## 1. Concentration Risk: Middle East Slowdown & International Exposure
- **~28% of L&T's E&C backlog is from international (largely Middle East) orders** [1], making the company highly sensitive to ME hydrocarbon capex.
- CLSA explicitly flags that L&T's **FY26 pipeline guidance of US$221bn (+57% YoY) appears "optimistic in the current environment especially with the perception of a slowing Middle East"** [2]. After a backlog that became energy-heavy (~50% of FY25 backlog), any softening in Saudi Aramco / ADNOC / KNPC capex would directly pressure inflows.
- Muted oil capex (if oil prices stay subdued) would weigh on the hydrocarbon vertical, though L&T expects to substitute with oil-to-chemicals work [8].

## 2. Margin Risk: "Cost Job" Drag and Conservative Accounting
- The **energy vertical carries large new orders in the "cost job" phase, where no margin is recognised** until execution matures [3]. This creates near-term downside on reported margins even as backlog grows — visible in FY25 where energy-segment margins fell on cost jobs of new large orders [3].
- CLSA itself notes that **L&T's FY26 margin guidance (+20bps) and execution assumptions are vulnerable** — its May 2025 note cut consolidated earnings 6%–7% over FY26–27 and **assumed no growth in FY26 E&C inflows on a high base and global uncertainty** [5].
- The guidance of only 20bps margin expansion in FY26 is itself a recognition of how slow the margin-recovery cycle is — CLSA views it as "conservative" with upside risk only if legacy orders bleed off and materials stay benign [6].

## 3. Competitive Intensity in Domestic EPC
- **"Competitive intensity in the domestic EPC space has led to aggressive pricing; if competition intensifies further, there could be downside to EBITDA margins"** [1]. As state-owned and private peers (HCC, Afcons, KEC, Tata Projects, Reliance) chase the same Modi 3.0 infrastructure tenders, bid discipline becomes a key margin lever.

## 4. Execution & Contractual Risk
- **"Strict labour laws and stringent liquidated damages clauses in the tenders can lead to cost overruns"** [1]. L&T's mega-projects (US$1bn+ EPC in ME, Indian infra) carry meaningful LD exposure if milestones slip.

## 5. Political & Policy Risk
- **"Any change of Govt. in India"** is listed as the first investment risk by CLSA [1]. L&T's domestic order book is heavily tied to Modi 3.0's capex push (railways, defence, water, urban infra); a policy pivot or fiscal slippage post FY26 budget would compress the pipeline.

## 6. Subsidiary Drag — Particularly IT Services
- L&T's **tech subsidiaries (LTIMindtree + LTTS — India's 5th largest tech franchise) reported slowing growth and margin declines in FY25** [4]. CLSA cut consolidated FY26–27 earnings 6%–7% primarily to reflect lower IT subsidiary earnings [5]. Given subsidiaries contributed ~31% of FY24 consolidated EPS [4], a prolonged IT services slowdown materially affects the consolidated growth trajectory.
- LTIMindtree's margin pressure compounds with broader Indian IT services demand softness — a risk that is non-correlated with the core E&C cycle thesis.

## 7. Balance Sheet & Working Capital
- Although improving, L&T's consolidated balance sheet still shows **net debt/equity of 102.7% in FY24 and 81.2% projected in FY25, with net debt/EBITDA of 4.4x in FY24** [7]. Working capital, while reduced (FY24 WC/sales 22.3%, modeled to 19.7% in FY25), remains elevated by sector standards.
- Any reversal in working capital discipline (claim settlements, delays in receivables from government clients) would hit RoE, which CLSA notes was 16.3% — already a 12-year high — and is partly mechanically driven by WC compression [6].

## 8. Divestment / Capital Reallocation Risk
- A material part of the bull thesis is capital reallocation to lift RoE toward management's 18% FY26 target. CLSA warns: **"Divestment of assets may be delayed if economic growth slows, posing a risk to valuations"** [1]. Hyderabad Metro is turning, but other non-core divestments / monetisations are not yet contracted.

## 9. Base Effect and Order Inflow Lumpiness
- FY25 order inflows grew +20% YoY on an already large base; **FY26 guidance is +10% on this lofty FY25 base** [2]. CLSA's own model conservatively assumes **zero growth in FY26 E&C inflows** to reflect the high base and global uncertainty [5]. Even a modest miss on inflows breaks the multi-year compounding narrative that supports L&T's premium multiple.

## 10. Global Macro / Tariff & Geopolitical Risk
- CLSA explicitly cites **"global uncertainty"** as a reason to assume flat inflows in FY26 [5]. Tariff escalation, ME conflict spillovers (Gulf shipping, Iran-Israel risk), or a sharp oil shock would simultaneously hit both the international order book and the IT subsidiaries — a rare cross-segment correlation.

---

## Risk Summary Table

| # | Risk | Channel | Severity |
|---|------|---------|----------|
| 1 | Middle East slowdown | ~28% of backlog international; FY26 pipeline +57% guide [1][2] | High |
| 2 | Energy "cost job" drag | Near-term margin recognition delay [3] | Medium |
| 3 | EPC competition | Domestic pricing discipline [1] | Medium |
| 4 | LD clauses / labour laws | Cost overruns on mega projects [1] | Medium |
| 5 | Indian political change | Modi 3.0 capex dependency [1] | Medium-High |
| 6 | IT subsidiary slowdown | LTIM/LTTS margins; ~31% of EPS [4][5] | Medium-High |
| 7 | High leverage | Net debt/equity ~103% FY24, NetD/EBITDA 4.4x [7] | Medium |
| 8 | Divestment delay | RoE bull case [1] | Low-Medium |
| 9 | Base effect | FY26 high-base growth [2][5] | Medium |
| 10 | Global macro / tariffs | Cross-segment hit [5] | Medium |

## What Would Disprove the Bear Case
- Multiple US$1bn+ ME hydrocarbon order wins through 2H FY26 confirming pipeline conversion.
- Energy-vertical margin recognition crossing the "cost job" hump (likely 4QFY26/1QFY27 per management) [3].
- LTIMindtree/LTTS demand recovery (TCV bookings, BFSI spending).
- Continued working capital compression below 18% of sales [7].

---

**Sources**
[1] India L&T at CITIC CLSA Investors' Forum 2024 (Investment risks section) — CLSA, 2024-09-11 — 607939401LinqAlpha.PDF
[2] Larsen & Toubro - O-PF (Guidance surprise) — CLSA, 2025-05-08 — 607958683LinqAlpha.PDF
[3] Larsen & Toubro - O-PF (Guidance surprise) — CLSA, 2025-05-08 — 607958683LinqAlpha.PDF
[4] Larsen & Toubro - O-PF (Subsidiaries deliver) — CLSA, 2025-05-07 — 607958427LinqAlpha.PDF
[5] Larsen & Toubro - O-PF (Subsidiaries deliver) — CLSA, 2025-05-07 — 607958427LinqAlpha.PDF
[6] Larsen & Toubro - O-PF (Guidance surprise) — CLSA, 2025-05-08 — 607958683LinqAlpha.PDF
[7] Larsen & Toubro - O-PF (Guidance surprise) — Key Ratios table — CLSA, 2025-05-08 — 607958683LinqAlpha.PDF
[8] Larsen & Toubro - O-PF (Beat, beat, beat) — CLSA, 2025-01-31 — 607949334LinqAlpha.PDF

*Note: The internal CLSA archive has the most current L&T coverage through 8 May 2025 (post 4QFY25 results). External public-data (Manticore) earnings call chunks were not retrievable for ticker 500510 within the user-requested risk lens, so the synthesis above is anchored on CLSA's analyst risk framework. If you'd like, I can pull the L&T FY25 annual report's "Risk Management" section from the public filings (annual_report on ticker 500510 was indexed and accessible) for a management-perspective comparison.*

## Citations

- [1] **607939401LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2024/09/607939401LinqAlpha.PDF>
- [2] **607958683LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607958683LinqAlpha.PDF>
- [3] **607958683LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607958683LinqAlpha.PDF>
- [4] **607958427LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607958427LinqAlpha.PDF>
- [5] **607958427LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607958427LinqAlpha.PDF>
- [6] **607958683LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607958683LinqAlpha.PDF>
- [7] **607958683LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/05/607958683LinqAlpha.PDF>
- [8] **607949334LinqAlpha.PDF** · clsa — <s3://ext-linq-rms-clsa/2025/01/607949334LinqAlpha.PDF>

