---
endpoint: analytics
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status: done
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citations: 10
created: 2026-05-31 20:03:57Z
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# What is the investment thesis for Larsen & Toubro in the current market environment?

# Larsen & Toubro (NSE: LT / BSE: 500510) — Investment Thesis

**As of 31-May-2026 | CLSA Rating: Outperform (O-PF) | Target Price: Rs 4,176 (~26% upside) | Reuters: LART.BO | Bloomberg: LT IB**

L&T is the dominant Indian EPC conglomerate and CLSA's preferred industrial vehicle for playing the simultaneous India + Middle East capex upcycle. With FY26 just concluded, the thesis rests on five interlocking pillars: an unprecedented order pipeline, structurally improving margins, ROE compounding into the high-teens, capital return discipline, and a successful pivot into global energy. The principal counterweight is foreign-investor underweight positioning and a softer perception of Middle East capex.

---

## 1. Rating, Target Price & Valuation Snapshot

| Metric | Value | Source |
|---|---|---|
| CLSA rating | **Outperform (O-PF)** | [1] |
| 12M target price | **Rs 4,176** (raised from Rs 4,151) | [1][6] |
| Implied upside | **+26%** | [6] |
| Market cap | US$53.3bn | [6] |
| Shares in issue | 1,374.7m | [6] |
| 3M ADV | US$84.3m | [6] |
| Foreign shareholding | 20.0% | [6] |

**Earnings & multiples (CLSA estimates):**

| FY (to 31 Mar) | 23A | 24A | 25CL | 26CL | 27CL |
|---|---|---|---|---|---|
| Net profit (Rs m) | 103,347 | 124,538 | 155,882 | 183,794 | 217,977 |
| EPS (Rs) | 73.5 | 90.6 | 113.4 | 133.7 | 158.6 |
| EPS growth (% YoY) | 19.7 | 23.2 | 25.2 | 17.9 | 18.6 |
| PE (x) | 45.2 | 36.7 | 29.3 | 24.8 | 20.9 |
| PB (x) | 5.2 | 5.6 | 5.1 | 4.5 | 3.7 |
| ROE (%) | 12.0 | 14.5 | 18.2 | 19.3 | 19.4 |
| Dividend yield (%) | 0.9 | 1.0 | 1.2 | 1.4 | 1.5 |

Source: CLSA [5]

CLSA argues L&T trades at a **17–194% FY26 PE discount to Indian industrial comps**, making it relative value within the sector despite delivering compounding EPS and ROE expansion [8].

---

## 2. The Core Thesis Pillars

### Pillar 1 — An Order Book of Unprecedented Scale (the structural alpha)

L&T's order machine has structurally re-rated. Per the company's Q4 FY26 results (May 2026), **group order inflows compounded at 20% CAGR from INR 1.7 trillion in FY21 to INR 4.4 trillion in FY26** — well ahead of the 14% CAGR set out in the Lakshya'26 plan [17]. The forward pipeline supports continuation:

- **FY27 prospects pipeline: INR 17.8 trillion**, providing strong visibility for the 10–12% inflow guidance management has given for FY27 [18].
- **Infrastructure segment order book: INR 4.23 trillion (March 2026)** with a 27-month book-to-bill ratio [22].
- **Energy segment order book: INR 2.58 trillion** — Hydrocarbon INR 1.95 trillion + CarbonLite Solutions INR 0.63 trillion [21].
- CLSA's earlier May-2025 work flagged a **FY26 prospects pipeline of US$221bn, up 57% YoY**, driven by a 93% YoY rise in hydrocarbon prospects [4].

Two reads on this: (a) The backlog provides multi-year revenue visibility insulated from cyclical India macro wobbles; (b) the FY27 prospects pipeline at INR 17.8tn is ~4x the FY26 actual inflow — even with low conversion, visibility is rare in Indian large-caps.

### Pillar 2 — Margin Inflection After Five Flat Years

This is the **most under-appreciated leg** of the thesis. After half a decade of essentially flat core E&C margins, FY25 delivered a 10bps expansion and management guided 20bps further for FY26 [2]. CLSA views the guidance as **conservative**, citing four levers stacked in the company's favour:

1. **Lower legacy orders** rolling off the mix
2. **A lower base** of margin to compare against
3. **Maturity of backlog** moving from early-stage "cost jobs" (zero margin recognition) to revenue-recognition phase
4. **Benign materials** — cement, bitumen and diesel all down 5%/6%/2% from 1-year peaks [3]

Together these point to margin upside risk rather than downside through FY26–27.

### Pillar 3 — ROE & Return-Ratio Re-rating

ROE has lifted from ~12% in FY23 to **18.2% in FY25E**, with CLSA modelling 19.3% in FY26 and 19.4% in FY27 [5]. The Q4 FY25 print showed RoE at a **12-year high of 16.3%**, up 140bps despite execution growth of 18% YoY — i.e., growth and capital efficiency improved simultaneously [3]. In Q4 FY26 the company reported trailing 12M ROE of 15.5% (16.6% ex-labour code provision), with NWC/sales improving from 11% to 4.1% YoY [7].

### Pillar 4 — Energy Pivot: From Indian Industrial to Global Energy Play

L&T has reshaped its identity. **"Energy should likely cross 50% of FY25CL backlog"**, positioning it as a serious global energy player rather than just an Indian infra contractor [8].

The energy stack spans the full value chain:
- **Renewables & green hydrogen**: L&T won billion-dollar contracts in the Middle East RE space, where it built a "contractor of choice" reputation by not reneging when module prices spiked over FY21–24. RE now accounts for ~19% of the Infra vertical [10].
- **Gas/LNG**: The hydrocarbon (LTH) backlog 2x'd over FY18–23, driven by large complex wins at Aramco. The **US$4bn+ QatarEnergy LNG offshore gas order — L&T's largest EPC contract ever, taking it into the global multi-billion-dollar EPC league** [7][11].
- **Power T&D**: c.14% of the Infra vertical [10].
- **Carbon Lite / thermal**: India's 80GW fossil capacity plan is reviving thermal awards. L&T won its **biggest-ever US$3bn capital goods order from NTPC**, with CLSA expecting further large orders in FY26–27 as India completes its 80GW ordering [9].

The mix matters: higher-margin gas/LNG orders offset lower-margin variable-RE contracts, supporting a stable blended margin [7]. Strategically, the >50% energy mix could attract global energy-focused funds that historically did not consider L&T because it isn't in their benchmark indices [8].

### Pillar 5 — Subsidiary Re-rating ("31% of consolidated EPS")

Subsidiaries (~31% of FY24 consolidated EPS) delivered **18% PAT growth in FY25** [12], with two specific re-rating stories:

- **L&T Finance Holdings (LTFH, 66% subsidiary)**: Recurring PAT +50% YoY in FY25 on top of +64% YoY in FY24, driven by retailisation of the loan book to 97% (vs 75% in FY23) and asset-quality improvement [13]. In Q4 FY26 management reported **98% retailisation with healthy 2.4% ROA** [25].
- **Hyderabad Metro (100% sub)**: 24% YoY reduction in losses on Rs13bn of land monetisation and Rs9bn of interest-free state support. **SPA signed for divestment**, expected to close Q1 FY27 — removing a multi-year drag [15][23].
- **LTTS / LTIM**: The tech subsidiaries were the laggards (margin declines) but **LTTS guided for double-digit CC revenue growth in FY26**, and management expects both to regain PAT-growth leadership from 2HFY26 [14].

---

## 3. The Modi 3.0 / Indian Capex Macro Set-up

The bull case extends beyond L&T-specific factors to the broader Indian E&C cycle CLSA argues investors are underweight:

- **India's top 30+ E&C companies' US$213bn backlog grew 23% YoY — the highest in a decade — with 4Q margins at all-time highs** [4 — Capex #63].
- Capex/GDP intensity has roughly doubled in the central budget over FY20–24, and the Modi 3.0 government has "hit the ground running" by ordering immediately upon assuming power, validating the new capex-driven (vs. consumption-driven) growth model.
- Indian contractors are simultaneously winning in the Middle East, where both fossil and non-fossil capex are rising.

Within this universe, **L&T, NCC, BEL, HNAL and IRB are CLSA's top picks** — with L&T positioned as the "best play on India and Middle East capex theme" [1][4].

The "negative-space" signal from the US NDR (June 2025) is informative: long-only investors **were still looking to add L&T**, while showing no interest in expensive industrials like BHEL. **Foreign-investor underweight positioning in L&T could hurt them** if the capex thesis plays out — i.e., the technical positioning skew is itself an asymmetric setup [1 — Capex #65].

---

## 4. Capital Return & Lakshya'31 Strategic Plan

Management completed Lakshya'26 cleanly and announced **Lakshya'31** (FY27–FY31) at the May 2026 results call. The key elements that support shareholder returns:

- **Concessions portfolio fully exited**: SPAs signed for Nabha Power and Hyderabad Metro, both closing Q1 FY27 — "virtually done and dusted" per management [17][8].
- **Capital allocation discipline**: New-business CapEx tightly scoped — INR 50bn industrial electronics, INR 30bn semiconductors, INR 150bn green hydrogen, INR 100bn data centers.
- **First Indian corporate to issue an ESG sustainability-linked bond under SEBI framework**, plus **US$700m sustainability-linked trade finance facility** — financing diversification at lower spreads tied to ESG KPIs [24].
- **MSCI ESG rating upgraded from BBB to A** (Nov 2025), with a Blended ESG Score of 78.9% — well above country (58.9%) and GEM sector (55.9%) averages [24].
- **Data center business rebranded as "L&T-Vyoma"**, with 30MW total commissioned at Kanchipuram positioning it for hyperscale expansion [26].

---

## 5. Key Risks & The Bear Case

| Risk | Discussion | Source |
|---|---|---|
| **Middle East slowdown / Aramco capex cut** | Markets may be concerned about Aramco oil capex, though L&T's gas capex (its preferred "transition fuel" focus) continues. Mitigant: Q4 FY26 confirmed all ME project sites operational, INR 3 trillion ME order book, no cancellations, payments on schedule. | [4][19][20] |
| **West Asia conflict execution drag** | Q4 FY26 execution impacted in March 2026 due to supply chain disruptions from West Asia conflict — driving softer 12% FY26 revenue growth vs 15% guidance. Management expects softer H1 FY27 before pickup. | [20] |
| **Lofty base for orders** | FY25 inflows +20% YoY on top of FY24's +39% YoY — base effect makes the FY27 10–12% inflow guidance plausible but not heroic. | [2] |
| **Energy segment margin pressure** | Energy segment Q4 FY26 margin at 6.5% (vs 8.2% YoY) on cost overruns / close-out costs in legacy projects. Management expects recovery in 1–2 quarters. | [21] |
| **Foreign investor underweight** | Could be re-rating fuel if the macro plays out — but is a headwind in the short term. | [1] |
| **Soft India order patch** | Capex Insights #65 flagged possibility of soft near-term India orders. | [4] |

---

## 6. The "So What" — Investment Conclusion

L&T sits at the intersection of three structural tailwinds that few other Indian large-caps offer simultaneously:

1. **India's multi-year capex upcycle** (Modi 3.0 government continuity + 6–7% GDP trajectory + budget-led capex intensity)
2. **Middle East energy capex** (Aramco, QatarEnergy, GCC offshore wind / hydrogen — with L&T as the "contractor of choice")
3. **Internal margin inflection** (legacy orders rolling off + benign input costs + execution maturity)

Layered on top: a self-funding model (NWC at 4.1% of sales, FCF yield rising to 7.1% by FY27 [11]), de-risked balance sheet (concessions exited), ROE at 12-year highs, and **a Lakshya'31 strategic plan that the prior Lakshya'26 outperformed by 600bps of CAGR**.

The valuation set-up — **24.8x FY26 PE / 4.5x PB at ~19.3% ROE** with EPS growth still ~18% YoY — is reasonable in absolute terms and cheap relative to Indian industrial comps (17–194% PE discount to peers) [8]. The base case is compounding through the cycle; the upside case is foreign-investor re-engagement closing the relative-value discount.

CLSA's **Outperform rating, Rs 4,176 TP (26% implied upside)** [1][16] is the cleanest expression of this thesis in the sell-side literature available. Catalysts to monitor: (i) FY27 quarterly order inflow prints (need 10–12% to validate the Lakshya base), (ii) E&C margin trajectory (the 20bps guidance is the conservative anchor), (iii) Hyderabad Metro & Nabha Power closes in Q1 FY27, (iv) Energy segment margin recovery post-legacy roll-off.

---

**Sources**

[1][6][2][3][4][5] CLSA — *Larsen & Toubro — O-PF (Guidance surprise)* — Bharat Parekh, 8-May-2025 — 607958683LinqAlpha.PDF
[7][8][9][10][11] CLSA — *Larsen & Toubro — O-PF (Understanding L&T #28)* — Bharat Parekh / Adarsh Agarwal, 28-Mar-2025 — 607954265LinqAlpha.PDF
[12][13][14][15][16] CLSA — *Larsen & Toubro — O-PF (Subsidiaries deliver)* — Bharat Parekh, 7-May-2025 — 607958427LinqAlpha.PDF
[17][18][19][20][21][22][23][24][25][26] *Larsen & Toubro Ltd., Q4 FY2026 Earnings Call*, 5-May-2026
Additional context: CLSA — *India Capex Insights #65 (US NDR feedback)*, 24-Jun-2025; CLSA — *India Capex Insights #63 (Modi 3.0 capex)*, 28-May-2025; CLSA — *Larsen & Toubro (Biggest order ever)*, 26-Mar-2025

## Citations

- [17] **Larsen & Toubro Ltd., Q4 2026 Earnings Call, 5-May-2026 9** · external
- [18] **Larsen & Toubro Ltd., Q4 2026 Earnings Call, 5-May-2026 9** · external
- [19] **Larsen & Toubro Ltd., Q4 2026 Earnings Call, 5-May-2026 9** · external
- [20] **Larsen & Toubro Ltd., Q4 2026 Earnings Call, 5-May-2026 9** · external
- [21] **Larsen & Toubro Ltd., Q4 2026 Earnings Call, 5-May-2026 9** · external
- [22] **Larsen & Toubro Ltd., Q4 2026 Earnings Call, 5-May-2026 9** · external
- [23] **Larsen & Toubro Ltd., Q4 2026 Earnings Call, 5-May-2026 9** · external
- [24] **Larsen & Toubro Ltd., Q4 2026 Earnings Call, 5-May-2026 9** · external
- [25] **Larsen & Toubro Ltd., Q4 2026 Earnings Call, 5-May-2026 9** · external
- [26] **Larsen & Toubro Ltd., Q4 2026 Earnings Call, 5-May-2026 9** · external

