Buy Larsen & Toubro Ltd For Target Rs. 3,850 By JM Financial Services
Healthy backlog and robust prospects pipeline to drive growth
L&T reported strong 4Q25 earnings with PAT at INR 50bn, marginally ahead of JMFe of INR 49bn (consensus: INR 45.5bn), led by higher other income and lower interest costs. Reported PAT at INR 55bn includes reversal of impairment of INR 4.7bn in L&T Special Steels and Heavy Forgings. P&M business revenue/EBITDA grew by 12%/15% YoY to INR 569bn/INR 56bn (JMFe: INR 548bn/INR 53bn), with EBITDA margin expanding by 30bps YoY to 9.9% (JMFe: 9.6%). Consolidated order inflows grew by 24% YoY to INR 896bn (JMFe: INR 1.08tn). Order backlog grew by 22% YoY to INR 5.79tn (3.1x TTM P&M revenues). NWC remained comfortable at 11% of revenue in Mar-25 (vs. 12.7% in Dec-24). Bid pipeline remains robust at INR 19tn for FY26 (up 58% YoY), with infrastructure prospects at INR 9.64tn and hydrocarbon prospects at INR 7.47tn. L&T has guided for revenue and order inflow growth of 15%/10% with P&M margins of 8.5% for FY26E. Strong EPS growth of 19% CAGR over FY25-27E for P&M business and lower asset intensity to drive ROE expansion (14.9% in FY25 to 17.4% in FY27E). Maintain BUY with revised price target of INR 3,850 (P&M business valued at 30x FY27E EPS).
* Earnings marginally above JMFe due to higher other income/lower interest costs: Consolidated revenue grew by 11% YoY to INR 744bn (JMFe: INR 729bn) led by strong execution in Hydrocarbon (+53% YoY) segment. Consolidated EBITDA grew by 13% YoY to INR 82bn (JMFe: INE 85bn). Adjusted PAT at INR 50bn (+17% YoY) was marginally above JMFe of INR 49bn due to higher other income and lower interest costs. P&M business revenue/EBITDA grew by 12%/15% YoY to INR 569bn/INR 56bn (JMFe: INR 548bn/INR 53bn). P&M EBITDA margin increased by 30bps YoY to 9.9%. It was above JMFe of 9.6% due to higher margins in Hi-Tech manufacturing and Others segment partly offset by lower margins in Infrastructure segment (8% in 4Q25 vs. JMFe of 8.8%).
* Order backlog grew by 22% YoY; Prospects pipeline robust at INR 19tn: L&T reported robust order inflows of INR 896bn in 4Q25, (up 24% YoY; JMFe: INR 1.08tn), driven by strong P&M inflows of INR 721bn (+29% YoY; JMFe: INR 900bn). Order backlog grew by 22% YoY to INR 5.79tn (3.1x TTM revenue). Prospects pipeline robust at INR 19tn for FY26 (+58% YoY), with infrastructure prospects at INR 9.64tn (+33% YoY) and hydrocarbon prospects at INR 7.47tn (+93% YoY).
* Guides for revenue/order inflow growth of 15%/10% for FY26E: L&T has guided for a revenue growth of 15% YoY for FY26E. While it has guided for 10% YoY growth in order inflows, there is an upside risk given the robust bid pipeline. L&T expects P&M margins to expand by 20bps YoY to 8.5% in FY26E.
* Expect 19% CAGR in P&M earnings over FY25-27E; supports valuations: We expect EPS CAGR of 19% over FY25-27E for L&T’s P&M business led by robust order backlog and margin expansion. Strong growth and reducing asset intensity (lower NWC & asset sales) should drive ROE expansion to 17.4% by FY27 (14.9% in FY25). Valuations at 24.6x FY27E P&M business EPS remain well supported. Maintain BUY with revised price target of INR 3,850 (P&M business valued at 30x Mar-27E EPS).
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