L&T Sees Macro Risks Loom Amid Decent Q3 Performance: HSBC

HSBC Global Investment Research expects Larsen & Toubro Ltd. to post a decent third quarter performance, supported by a stronger order prospect pipeline and a robust order backlog, even as macro concerns weigh on capex outlooks domestically and internationally.

The brokerage retains a 'hold' rating but cuts the target price to Rs 3,900 from Rs 4,000, implying a 3% downside.

The quarter has begun with a strong order prospect pipeline, with the company reporting a 28% increase in the current H2 pipeline. Management indicated during the Q2 call that it is close to securing a few large opportunities. HSBC estimates announced orders at Rs 33,300 crore, though a substantial portion remains unannounced in terms of value and counterparty.

L&T can absorb an 11% decline in order inflows in the second half of the fiscal and still meet its 10% OI guidance for FY26, believes the brokerage. HSBC expects Rs 1 lakh crore of OI in Q3, implying a 10% annual decline due to a high base.

On execution, Q2 faced challenges from inclement weather and slower execution, which may spill into Q3. Despite this, HSBC expects 24% revenue growth in Q3 on a low base. To meet its 15% FY26 revenue guidance, L&T needs 17% growth in FY26 H2, which HSBC believes is achievable.

HSBC flags macro worries beyond Q3 and cuts its Q4 OI estimates amid global market volatility, low oil prices, and the possibility of controlled central capex due to lower tax revenues. As a result, it trims FY26 OI growth to 15% from 18% earlier. However, the large order backlog is expected to support sustained earnings performance.

While HSBC remains positive on the strong order book driving execution over the next few years, it sees potential slowing in central and state government orders due to fiscal prudence and tighter policy. In the Middle East — one of L&T’s fastest-growing markets — lower oil prices and a potential gas supply glut over the next three years could slow ordering activity.

Private capex is expected to pick up, with 30% of L&T’s order book now from the private sector, though HSBC cautions this segment has disappointed in the past. Trade disruptions could also pose margin risks. Valuations appear stretched, says the brokerage, with the stock trading at 25x FY27E PE, one standard deviation above the 2015–19 cycle mean, offering limited margin of safety.