Whalesbook
Larsen & Toubro (L&T) has adjusted its FY27 guidance, now forecasting 10-12% revenue growth for its core projects and manufacturing segments. This is a step down from the 12% growth seen in FY26. Crucially, the company expects stable EBIT margins, a notable shift from earlier projections of improvement. These outlook changes stem from significant geopolitical instability in the Middle East, a region vital to L&T's operations. Tensions there are causing supply chain disruptions, pushing up input costs, and leading to shipping delays, especially through key routes like the Strait of Hormuz.
L&T's operational performance in Q4 FY26 showed an 11% year-on-year revenue increase, driven by strong execution in its energy sector and healthy growth in IT services. However, overall EBITDA margins compressed by 60 basis points year-on-year. This was mainly due to cost overruns in energy projects and the completion of older contracts. Escalating global crude oil prices, up approximately 60%, add another layer of complexity. Higher energy costs directly translate into increased expenses for fuel, transportation, and logistics for infrastructure projects, a trend seen across India's infrastructure and construction sectors. While L&T aims to pass these cost increases to clients, the lag in passing them on is expected to affect margins in the first half of FY27. Other companies in the sector are also navigating similar supply chain challenges.
Despite these near-term pressures, L&T's long-term Lakshya 2031 strategy continues as planned. This plan targets a 10-12% order inflow CAGR and a 12-15% revenue CAGR through FY31. The company's robust order book, standing at ₹7.40 lakh crore as of March 2026 (a 28% increase year-on-year), provides a strong cushion. Its substantial international order book, valued at ₹3.6 lakh crore with considerable exposure to Saudi Arabia and the UAE, positions L&T to potentially benefit from regional rebuilding efforts once tensions ease.
The current valuation of L&T, with a P/E ratio around 33-37x, appears high compared to the adjusted FY27 guidance and potential margin declines. The sharp run-up in valuation to near long-term averages calls for caution. Some analysts, including Jefferies (target ₹4,885) and CLSA (target ₹4,842), maintain 'Buy' ratings, citing the strong order book and long-term growth potential. However, others have downgraded ratings to 'Neutral' or 'Hold' with reduced price targets. UBS, for instance, reduced its price target, citing these risks. These analysts point to subdued Q4 FY26 performance and concerns over FY27 order inflow momentum and execution challenges. Its heavy reliance on the Middle East also exposes L&T to supply chain vulnerabilities and rising operational costs.
Looking ahead, L&T is focusing on digital adoption, AI integration, and new ventures in areas like data centers, green hydrogen, and semiconductor design. This strategy aims to diversify revenue and improve profitability, a necessary pivot given current margin pressures. Historically, Middle East instability has led to stock price corrections for L&T, with de-escalation often triggering rallies. How the company navigates these geopolitical factors while pursuing its long-term growth agenda will be key for investors.