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Our recent interaction with Larsen & Toubro ( LT IN) management indicates the company is entering a structurally diversified growth phase, with core infrastructure pre -tax ROCE sustaining at 30% (after improving from ~18% to ~35% in the past five years ) on the back of 1) a healthy domestic ordering momentum by the government and private sector s, 2) developing new growth drivers via capex push , and 3) our deep -dive analysis of Middle East disruption to limit risk while potentially creat ing a USD 50 – 80bn , resilience -led capex opportunity in the medium term. We retain Accumulate with a SOTP -based TP of INR 4,251

Middle East disruption driving resilience capex opportunity:

The Middle East ’s geopolitical disruptions could create near -term execution challenges for onshore hydrocarbon projects, although risks remain partly offset, as ~50% of LT’s hydrocarbon exposure is offshore - oriented with fabrication largely executed through India and Oman yards. Management expects the disruption to accelerate a resilience -led capex cycle across the UAE, Qatar , and Kuwait, with potential opportunities of nearly USD 50 – 80bn in the m edium term .

Core EPC delivering higher returns:

Our interaction highlights a structurally stronger and more capital -efficient EPC model, with core infrastructure pre -tax ROCE improving to ~35% from ~18% in the past five years. Management remains confident of sustaining ~30% normalized core ROCE despite investments i n industrial electronics and hydroc arbons in core portfolio of projects, products and manufacturing (PPM ). FY31 consolidated ROE guidance of sustaining ~16% factors in the gestation impact from investment in emerging businesses , such as data cent ers & green hydrogen , reflect ing disciplined capital allocation

Disciplined growth strategy emerging:

Management’s capital allocation framework appears significantly more disciplined vs earlier infrastructure cycles, with investments focused on contracted cashflow models and high -credit counterparties to limit balance -sheet risk. Simultaneously, defense , offshore wind , and electronics are emerging as key growth drivers , with defense contributing ~4 – 5% of revenue with potential to grow meaningfully and offshore wind orders from the EU scaling up.

Domestic capex and energy demand continue to drive ordering momentum:

LT continues to witness strong domestic capex momentum across infrastructure, thermal power, hydrocarbons , and manufacturing, supported by rising electricity demand and AI -led data center expansion. On the back of demand, the company has committed a capex of INR 424bn by FY31 , led by green hydrogen, data centers, industrial electronics, hydrocarbons and real estat e with benefits accruing in the long t erm

Reiterate Accumulate with a TP of INR 4,251:

We believe the previous five -year plan witnessed an accelerated growth phase and future performance would be based on its ability to scale up new businesses. We largely retain estimates . We reiterate Accumulate with a TP of INR 4,251 based on a SOTP method, assuming 26x FY28E P/E to E&C and a stake in IT subsidiaries at a 20% holdco discount

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