---
endpoint: analytics
pattern: Conglomerates
status: done
latency_ms: 209953
conversation_id: 7924c56b-8b4e-46d9-bc2c-97a737da0977
citations: 15
created: 2026-05-31 21:25:36Z
---

# What’s the bull case bear case for Larsen & Toubro?

# Larsen & Toubro (L&T, NSE: LT / BSE: 500510) — Bull Case vs. Bear Case

**Source mix:** Primary evidence is from internal CLSA research on L&T (Outperform-rated, India Conglomerates coverage). TFS public-data searches surface chunks from L&T's listed subsidiaries (LTTS, LTM/LTIMindtree) but no parent-company L&T earnings transcript chunks under ticker `500510` were available in the public index — the parent thesis below is therefore built off the May 7-8, 2025 4QFY25 review notes and the June 2025 India Capex Insights notes from CLSA. All figures below come from these CLSA notes unless noted.

**CLSA snapshot (8 May 2025):** Rating O-PF (Outperform), 12M Target Price **Rs 4,176**, vs spot in Rs 3,059–3,947 band, implying **+26% potential upside**. Market cap **US$53.3bn**, 3M ADV US$84m, free float 86%, foreign holding 20% [1].

---

## Bull Case

### 1. Best-in-class proxy on the India + Middle East capex super-cycle
- CLSA's core thesis: *"L&T is a key India & Middle East (ME) Capex cycle play. With its diversified product suite, it enjoys a tailwind for order inflow with gov., private, industrial and Middle East. Capex likely to sustain its double-digit growth in core E&C execution. Margins are likely to expand after four years & capital reallocation adds a further catalyst."* [6]
- India's top 30+ E&C companies grew backlog **23% YoY to US$213bn in FY25** — the highest in a decade — with sector book-to-bill at **3.8x**, giving multi-year execution visibility [13].

### 2. Structural beat across every guidance metric (FY25)
For the third consecutive year, L&T beat every operational guidance line in FY25 [2]:
| Metric | FY25 Guidance | FY25 Actual |
|---|---|---|
| E&C order inflows | 10% growth | **20% YoY** |
| Execution growth | 15% | **18% YoY** |
| Working capital | 12% of net sales | **11.4%** |
| E&C Ebitda margin | Flat | **+10bps** |

### 3. Record order book and pipeline
- Consolidated order backlog **Rs 5.79 tn (US$68bn), up 19–22% YoY** — the highest in the 12-year series CLSA tracks [4].
- Energy order backlog up **+40.2% YoY**; Hi-Tech Manufacturing (heavy + defence) backlog up **+26%** [4].
- Tendering pipeline **+57% YoY** into FY26 [2].

### 4. Mega-deal momentum (4QFY25 announced wins)
The headline 4Q win was the **QatarEnergy LNG Ultra Mega Offshore Contract worth Rs 370bn (~US$4.3bn)** for the NFPS COMP 4 project — *"the largest single contract ever received by L&T"* [11]. Other 4Q announced wins totaling **Rs 590bn** included [5]:
- Hindalco 850 KTPA greenfield alumina refinery (Odisha) — Rs 40bn
- ACWA Power's Ras Mohaisen desalination plant (Saudi Arabia, with Lantania of Spain) — Rs 38bn
- Brigade Group residential/commercial towers (Hyderabad & Chennai) — Rs 38bn
- 765kV transmission lines (Uttar Pradesh RE zone) — Rs 35bn
- 765kV GIS substation + Riyadh 380kV transmission lines — Rs 38bn
- GCC freight handling facilities — Rs 15bn

### 5. FY26 guidance is conservative — upside risk
Management guided FY26 to **10% order growth on a higher base, 15% execution growth, and 20bps of core margin expansion** [3]. CLSA views the margin guidance as conservative, citing four sources of upside: (a) lower legacy orders rolling off, (b) lower base, (c) maturity of backlog (early-stage "cost jobs" yet to cross margin recognition threshold), (d) benign material costs (cement -5%, bitumen -6%, diesel -2% YoY) [3].

### 6. Margin and ROE inflection after a 5-year trough
- Core E&C margin had **fallen 308bps over the prior 5 years** (Covid under-utilization → 2023 cost jobs) — CLSA sees the FY25 turn as a **structural inflection from a low base** [12].
- Working capital fell **100bps YoY to 11.4% of net sales** despite execution +18% — driving consolidated **RoE +140bps to 16.3%, a 12-year high** [3].
- CLSA models **23% EPS CAGR FY24-FY27CL** and **RoE reaching 20% by FY27** vs 14% in FY24, with dividend yield rising to **1.5% in FY27CL** [7].

### 7. Subsidiaries finally pulling their weight
Subsidiaries delivered **31% of consolidated EPS in FY24** and grew recurring PAT **+18% in FY25** — led by L&T Finance (LTFH PAT +50% on a "retailised" book vs low-ROA wholesale) and Hyderabad Metro (24% YoY loss reduction) [10].

### 8. Positioning is supportive
- FIIs have been **persistently underweight L&T** (CLSA frames this as "complacency on underweight industrials could hurt"), while DII mutual funds have just reversed their underweight in the last two quarters [8].
- *"With L&T's superior earnings profile of 18% YoY over FY25-27CL and a rising ROE, any outperformance of this large-liquid stock versus India global benchmark indices could hurt funds."* [8]

---

## Bear Case

CLSA's own published risk register on the name [8]:

### 1. Political / regime risk
*"Any change of Govt. in India"* is flagged as the first-named investment risk — the capex thesis is partly underwritten by Modi 3.0 fiscal commitment.

### 2. International concentration risk
**~35% of L&T's order backlog is from international (largely Middle East) orders** [8]. International order backlog actually grew **+44% YoY** and international revenue surged **+124% YoY in 4Q** — concentration to GCC fossil + non-fossil capex (Qatar, Saudi) is now structurally material [4]. A regional capex pullback (oil capex deferral, sovereign budget retrenchment) would hit a disproportionate share of the book.

### 3. Execution risk on aggressive overseas contracts
*"Strict labour laws and stringent liquidated damages clauses in the tenders can lead to cost overruns."* [8] The Qatar Energy Ultra Mega order alone is Rs 370bn — single-project execution risk has scaled with deal size.

### 4. Competitive intensity → margin downside
*"Competitive intensity in the domestic EPC space has led to aggressive pricing; if competition intensifies further, there could be downside to Ebitda margins."* [8] Domestic Ebitda margin guidance has been a chronic disappointment vintage — and FY26 domestic orders are guided flat after a -8.6% YoY domestic E&C inflow print in 4QFY25 [4].

### 5. "Cost jobs" and conservative accounting drag on near-term margins
Energy segment margins fell in 4QFY25 because the large new orders are in the early phase where **no margin is recognized until threshold is crossed** [2]. CLSA itself notes that *"margin should be soft on its conservative accounting policy"* and **cut consolidated earnings 6-7% over FY26-27** at the May 2025 review [9].

### 6. IT subsidiary headwinds
L&T's tech subsidiaries (LTIMindtree / LTTS — India's 5th largest tech franchise, ~11.7% YoY growth in 4QFY25) **reported slowing growth and margin declines in FY25** [10]. With IT contributing roughly 18-19% segment Ebitda margins, any further deceleration weighs on consolidated earnings even when E&C delivers.

### 7. High base + global macro = lower order growth in FY26
Management's own FY26 order growth guidance is **only 10%** vs 20% achieved in FY25, reflecting the high base and global uncertainty. CLSA's model assumes **no growth in FY26 E&C inflows** [9].

### 8. Domestic backlog growth has decelerated sharply
Domestic E&C order backlog grew only **+6% YoY** (vs international +44%) in FY25 [4]. If GCC tendering slows before domestic catches up, the headline backlog growth narrative wobbles.

### 9. Valuation — already pricing in the inflection
- 12M target Rs 4,176 = +26%, but CLSA's SOTP applies a **25% discount to capital-goods comps** for the core E&C business [8] — narrowing that discount further (i.e., re-rating higher) requires sustained margin expansion to actually print.
- Sector backlog growth (+23% YoY) is the **highest in a decade** — by definition, base effects work against the YoY momentum from here [13].

---

## Summary Table

| Dimension | Bull View | Bear View |
|---|---|---|
| **Rating / TP** | O-PF, Rs 4,176, +26% [1] | SOTP already applies 25% discount to comps [8] |
| **Order book** | Rs 5.79 tn, +19-22% YoY, BTB 3.8x [4][13] | Domestic only +6% YoY; international +44% creates concentration [4] |
| **Inflows** | FY25 +20% (vs 10% guided); pipeline +57% YoY [2] | FY26 guided just +10%; CLSA models flat E&C inflows [9] |
| **Margin** | 12-yr-high RoE 16.3%, structural turn off low base [3][12] | New cost jobs + conservative accounting; competitive EPC pricing [2][8] |
| **Geographies** | India capex + ME mega-deals (Qatar, Saudi) [11][5] | 35% backlog from international; LD clauses, labour laws [8] |
| **EPS / RoE trajectory** | 23% EPS Cagr FY24-27CL, RoE 14% → 20% [7] | CLSA cut FY26-27 EPS by 6-7% on IT softness and conservative inflow assumption [9] |
| **Positioning** | FIIs underweight — risk of squeeze [8] | High base + global macro = harder YoY compares [9][13] |
| **Subsidiaries** | LTFH PAT +50%, Hyd Metro losses -24% [10] | IT subs (LTIM/LTTS) slowing with margin declines [10] |
| **Catalysts** | Capex cycle + capital reallocation + RoE re-rating [6] | Indian election cycle / Modi 3.0 commitment slippage [8] |

---

**Net read:** CLSA is constructively positioned (Outperform, +26% upside) and frames L&T as the cleanest large-cap proxy for the India + Middle East capex cycle, with a margin and RoE inflection just starting after five years of compression. The principal risks are: (i) FY26 base effects + domestic deceleration, (ii) execution on mega-orders, (iii) IT subsidiary drag, and (iv) the political/policy assumption embedded in the capex thesis. The investor positioning angle (foreign UW, domestic just turning) is asymmetric in favor of the bulls if execution + margin expansion print.

---

**Sources**
[1] CLSA — Larsen & Toubro O-PF (Guidance surprise) — 8 May 2025 — 607958683LinqAlpha.PDF (cover stats, target price, ratings)
[2] CLSA — Larsen & Toubro O-PF (Guidance surprise) — 8 May 2025 — 607958683LinqAlpha.PDF (4QFY25 guidance beat + FY26 guidance)
[3] CLSA — Larsen & Toubro O-PF (Guidance surprise) — 8 May 2025 — 607958683LinqAlpha.PDF (margin/RoE thesis)
[4] CLSA — Larsen & Toubro O-PF (Guidance surprise) — 8 May 2025 — 607958683LinqAlpha.PDF (4QFY25 segment table)
[5] CLSA — Larsen & Toubro O-PF (Guidance surprise) — 8 May 2025 — 607958683LinqAlpha.PDF (4QFY25 announced orders list)
[6] CLSA — Larsen & Toubro O-PF (Subsidiaries deliver) — 7 May 2025 — 607958427LinqAlpha.PDF (investment thesis)
[7] CLSA — Larsen & Toubro O-PF (Guidance surprise) — 8 May 2025 — 607958683LinqAlpha.PDF (EPS Cagr, RoE forecast)
[8] CLSA — India Capex Insights #63 (Modi 3.0 capex set to surprise) — 28 May 2025 — 607960785LinqAlpha.PDF (catalysts, risks, valuation framework)
[9] CLSA — Larsen & Toubro O-PF (Subsidiaries deliver) — 7 May 2025 — 607958427LinqAlpha.PDF (FY26-27 EPS cut)
[10] CLSA — Larsen & Toubro O-PF (Subsidiaries deliver) — 7 May 2025 — 607958427LinqAlpha.PDF (subsidiaries, LTFH, Hyd Metro, IT)
[11] CLSA — India Capex Insights #63 — 28 May 2025 — 607960785LinqAlpha.PDF (Qatar Energy press release excerpt)
[12] CLSA — India Capex Insights #63 — 28 May 2025 — 607960785LinqAlpha.PDF (5-year margin compression context)
[13] CLSA — India Capex Insights #63 — 28 May 2025 — 607960785LinqAlpha.PDF (sector backlog growth, top picks)
[14] CLSA — India Capex Insights #63 — 28 May 2025 — 607960785LinqAlpha.PDF (NCC order pipeline cross-reference)
[15] CLSA — Larsen & Toubro O-PF (Guidance surprise) — 8 May 2025 — 607958683LinqAlpha.PDF (announced order pipeline, Figure 25)

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