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 shares faced market pressure on Tuesday, declining over 3% following reports about potential project cancellations in Kuwait's oil sector. The stock closed at ₹3,888.80 on BSE, down from its previous closing price of ₹4,018.50, amid concerns over $8.7 billion worth of upstream oil project tenders that Kuwait is reportedly reviewing for cancellation.

Market Impact and Company Response

The sell-off was triggered by media reports indicating that Kuwait is considering cancelling several upstream oil project tenders worth approximately $8.7 billion after bids reportedly exceeded budgeted estimates. However, L&T quickly moved to clarify its position on these developments.

The company issued a statement confirming that the projects mentioned in media reports are not part of its existing order book. L&T further stated that it cannot comment on the tendering status or commercial decisions of its clients, effectively distancing its current business outlook from the reported developments.

Strong Q2 FY26 Financial Performance

Despite the market reaction, L&T's recent financial performance demonstrates robust fundamentals. The company's Q2 FY26 results showed strong growth across key metrics.

The company maintained healthy financial ratios during the quarter, with a debt-to-equity ratio of 1.09 and a current ratio of 1.25, indicating sound financial management.

Robust Order Book Growth

L&T's order inflow performance in Q2 FY26 highlighted the company's strong market position and execution capabilities.

The order book composition shows a balanced mix with ₹3,40,200 crores in domestic orders and ₹3,26,800 crores in international orders as of September 2025.

Stock Performance Context

While Tuesday's decline brought the stock down over 3%, L&T shares have delivered positive returns of over 12% in the past year. However, the stock has faced some pressure recently, falling approximately 5% over the last month. With a market capitalisation of ₹5.34 lakh crores, L&T remains one of India's largest engineering and construction conglomerates.

Company Profile

Larsen & Toubro is an Indian multinational engaged in EPC projects, hi-tech manufacturing, and a range of service sectors. The company operates as a major technology, engineering, construction, manufacturing, and financial services conglomerate with global operations across multiple markets.