Larsen & Toubro order surge masks valuation concerns after weak quarter
Engineering giant Larsen & Toubro reported a soft first quarter with margin compression, but a surging order book leaves investors questioning whether the stock's rich valuation leaves room for further gains.
Core engineering revenue for the June quarter edged up 2% year-on-year to ₹46,191 crore, while Ebitda margins contracted by 20 basis points to 7%. The engineering giant’s shares still climbed roughly 3% on Wednesday after management assured investors that project execution would accelerate in the second half of the fiscal year.
The softer results aligned with prior warnings regarding supply-chain disruptions linked to the West Asia conflict. Profitability also took a hit from a ₹250 crore expected credit loss provision tied to water and infrastructure projects, though management expects to eventually recover these time and cost overruns from clients.
Order momentum remained the primary positive driver, with core business inflows jumping 16% to ₹86,400 crore during the quarter. This pushed the total order book up 27% to ₹7.5 trillion, supported by a recent ₹15,000 crore offshore wind power contract from Europe.
Looking ahead, the company holds a ₹15 trillion opportunity pipeline split evenly between domestic and international markets at the end of June. Management expects project awards in West Asia to pick up starting in the second quarter, further bolstering the international segment.
Assuming a historical 22% conversion rate, Larsen & Toubro could secure ₹3.3 trillion in new contracts from this pipeline. Combined with first-quarter inflows, full-year order growth could comfortably exceed the company's 10-12% guidance.
Despite the robust pipeline, the stock's valuation presents a significant hurdle for investors seeking multiple expansion. Management is guiding for 10-12% revenue growth and a 7.8% Ebitda margin in the core engineering business for the current fiscal year.
After adjusting for stakes in subsidiaries like L&T Finance and L&T Technology Services, the core engineering business carries a net market capitalization of ₹3.9 trillion. Nuvama Institutional Equities estimates core engineering net profit will reach ₹17,200 crore in fiscal 2028, implying a demanding price-to-earnings multiple of 23 times.
Given the company's steady growth guidance and flat margin projections, the broker sees limited upside from current levels. Nuvama sets a target price of ₹4,065, which already assumes a 10% expansion in the valuation multiple to 25 times, against a current trading level near ₹3,940.
