HSBC Global Investment Research expects Larsen & Toubro to post decent third quarter performance, supported by stronger order prospect pipeline and robust order backlog, even as macro concerns weigh on capex outlooks both domestically and internationally. The brokerage maintains its hold rating while reducing the target price to ₹3,900 from ₹4,000, implying a 3% downside from current levels.

Strong Order Pipeline Drives Q3 Expectations

The quarter has commenced with promising order prospects, as the company reported a 28% increase in its current H2 pipeline. Management indicated during the Q2 earnings call that it is positioned to secure several large opportunities in the near term.

HSBC notes that a substantial portion of orders remains unannounced in terms of both value and counterparty details. The brokerage believes L&T can absorb an 11% decline in order inflows during the second half of the fiscal year and still meet its 10% order intake guidance for FY26.

Execution Challenges and Revenue Projections

Q2 faced execution challenges due to inclement weather conditions and slower project implementation, effects that may continue into Q3. Despite these headwinds, HSBC expects 24% revenue growth in Q3 on a comparatively low base. To achieve its 15% FY26 revenue guidance, L&T requires 17% growth in the second half of FY26, which HSBC considers achievable given current fundamentals.

Macro Concerns Impact Future Outlook

HSBC flags several macro worries extending beyond Q3 performance, leading to cuts in Q4 order intake estimates. Key concerns include:

• Global market volatility affecting international projects
• Lower oil prices impacting Middle East operations
• Potential controlled central capex due to reduced tax revenues
• Fiscal prudence leading to slower government orders

As a result, the brokerage has trimmed FY26 order intake growth expectations to 15% from the earlier projection of 18%. However, the large order backlog is expected to support sustained earnings performance over the medium term.

Regional and Sectoral Dynamics

In the Middle East, one of L&T's fastest-growing markets, lower oil prices and potential gas supply glut over the next three years could slow ordering activity. The brokerage expects private capex to gain momentum, noting that 30% of L&T's order book now comprises private sector projects, though this segment has historically been disappointing.

Valuation Concerns

HSBC highlights valuation concerns, noting the stock trades at 25x FY27E PE, representing one standard deviation above the 2015-19 cycle mean. This elevated valuation offers limited margin of safety according to the brokerage's assessment. Trade disruptions could also pose additional margin risks going forward.

While HSBC remains positive about the strong order book driving execution over the coming years, it cautions about potential headwinds from fiscal prudence and tighter policy affecting central and state government orders.

Larsen & Toubro issued a clarification on January 13 after reports emerged that Kuwait is discussing plans to cancel oil project tenders worth $8.7 billion. The engineering conglomerate's stock fell 4% following the media reports, prompting the company to address market concerns about potential impact on its business.

Company's Official Response

L&T clarified that the projects referenced in the media reports were not part of the company's order book. The company stated it cannot comment on the status of tenders or commercial decisions of its clients. This clarification aimed to address investor concerns about potential revenue impact from the reported tender cancellations.

Stock Performance Impact

The company's shares dropped to a one-month low during afternoon trading on Tuesday following the reports:

Kuwait's Tender Situation

According to media reports, Kuwait's discussions about cancelling the oil project tenders stem from bids coming in well above budget. This has raised concerns over cost efficiency and fiscal impact for the projects. Analysts quoted by CNBC-TV18 indicated that L&T was the lowest bidder in tenders worth more than $4.5 billion, though this could not be independently verified.

L&T's Order Book Outlook

Despite the current market volatility, L&T maintains a positive outlook for its order inflows. In October, the company expressed confidence in exceeding its FY26 guidance of 10% growth in group order inflows. The company's management highlighted its strong order prospects pipeline:

International Exposure

L&T's order book demonstrates significant international diversification. As of September 30, 2025, international orders formed 49% of the company's total order book. The hydrocarbon prospects remain predominantly international, with approximately 93% of opportunities located overseas, while CarbonLite Solutions prospects are primarily domestic.

Recent Stock Performance

Despite the recent decline, L&T shares have shown mixed performance over different timeframes. The stock has fallen around 7% in the past five days but gained nearly 10% over the past six months, indicating underlying investor confidence in the company's long-term prospects despite short-term volatility from market reports.