Larsen & Toubro order book momentum supports growth despite Q1 execution disruption

Investment View and Valuation

LKP Research maintained its BUY recommendation on Larsen & Toubro Limited (L&T) following the July 30, 2026 Q1 FY27 result update, despite near-term execution and margin pressure. The broker considers the company’s record order backlog, improving domestic private-capex mix, working-capital discipline and long-term growth visibility under Lakshya 2031 supportive of the investment case.

LKP revised its sum-of-the-parts target price to Rs 4,570, valuing L&T’s standalone core engineering business at 23 times FY28E EPS.

Q1 FY27 Financial Performance

L&T reported mixed Q1 FY27 performance. Consolidated revenue increased 6.7 per cent year-on-year to Rs 679 billion, below the company’s FY27 revenue-growth guidance of 10-12 per cent, as Projects, Products & Manufacturing (PPM) revenue grew only about 2 per cent.

EBITDA declined 3.2 per cent year-on-year to Rs 61.2 billion, while EBITDA margin contracted 92 basis points to 9.0 per cent. The pressure reflected weaker PPM execution, GCC supply-chain and logistics disruption, higher expected credit loss provisions and foreign-exchange headwinds at IT services subsidiaries. Core PPM EBITDA margin was 7.0 per cent, down 20 basis points year-on-year.

Reported PAT nevertheless rose 14 per cent to Rs 41.2 billion, supported by a 75 per cent increase in other income and lower interest costs.

Order Book and Growth Visibility

Order momentum remained robust. Q1 FY27 order inflow rose 14 per cent year-on-year to Rs 1.08 trillion, led by 27 per cent growth in international orders and ultra-mega European offshore-wind wins.

The order book reached a record Rs 7.79 trillion at June 2026, up 27 per cent year-on-year. International projects represented 52 per cent of the order book, with the Middle East accounting for 71 per cent of international projects and Europe accounting for 14 per cent.

The domestic order book, excluding Realty, is shifting towards private investment, with the private-sector share increasing to 40 per cent from 27 per cent a year earlier. The balance-nine-month FY27 prospect pipeline is about Rs 15 trillion, comprising Rs 7.82 trillion in Infrastructure & Utilities, Rs 4.37 trillion in Energy Conventional and Rs 2.43 trillion in Energy Green.

Management Guidance and Execution Outlook

Management retained FY27 guidance for 10-12 per cent growth in revenue and order inflow, along with a PPM EBITDA margin of about 7.8 per cent. Management expects the near term to remain relatively soft, but project awards and execution are expected to improve from Q2 FY27.

Middle East disruption was described as selective rather than broad-based. No projects have been cancelled, payments and collections remain on schedule, and 70-80 per cent of hydrocarbon projects remain in engineering and procurement, limiting disruption. Peak-construction projects are using alternate logistics routes.

Incremental freight costs are passed through where customers agree; otherwise, L&T is deferring affected activity rather than accepting uneconomic costs. Approximately half the order book is fixed-price, although management cited contractual protections as mitigating margin risk.

Segment Performance

Segment trends were varied across the business. Infrastructure & Utilities revenue fell about 2 per cent to Rs 221 billion, affected by early-stage project execution, slower Water-business activity, adverse mix and higher expected credit loss provisions. Its order book stood at Rs 3.51 trillion.

Energy Conventional revenue rose 14 per cent to Rs 142 billion, while Energy Green revenue declined about 11 per cent to Rs 56 billion because of GCC solar supply-chain disruption. Energy Green order inflow of about Rs 330 billion was driven by offshore wind, taking its order book to Rs 1.47 trillion, including Rs 740 billion of offshore wind.

IT & Technology Services revenue increased about 16 per cent to Rs 147 billion, while Financial Services revenue increased 27 per cent to Rs 50 billion.

Portfolio Actions and Cash Flow

L&T completed the Nabha Power divestment on June 25, 2026, with a marginal profit and about Rs 1.1 billion of capital-gains tax outflow. The Hyderabad Metro exit is expected to close by September 30, 2026.

LKP expects the Development Projects portfolio to transition towards green hydrogen and green ammonia build-own-operate assets. Net working capital to sales improved to 4.9 per cent in June 2026 from 10.1 per cent a year earlier, while operating cash flow was Rs 43 billion.

Earnings Estimates and Key Monitorables

LKP cut FY27E and FY28E EPS estimates by about 12.6 per cent and 5.5 per cent, respectively, to reflect soft Q1 execution and near-term margin pressure. The broker forecasts FY26-FY28E revenue and PAT CAGR of 12.4 per cent and 17.9 per cent, respectively, with EBITDA margin of 9.8-10.3 per cent.

Key monitorables include:

• Normalisation of Middle East execution.
• Easing of GCC solar bottlenecks.
• Improvement in Jal Jeevan Mission collections.
• Reversal of expected credit loss provisions.