What is the Future of L&T's Stock?

Editor's note: The share price of L&T is up about 20% from it's recent lows. But what about the future? Can investors expect similar fast profits? Equitymaster's Co-Head of Research, Tanushree Banerjee, has shared her views on the stock.

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India's longest sea bridge connecting the Indian city of Mumbai with the satellite city of Navi Mumbai named Atal Setu was constructed by L&T.

So was Sri Ram Janmabhoomi Mandir in Ayodhya inaugurated in January 2024.

Despite competition over the decades, L&T retains near monopoly when it comes high value critical EPC projects.

This is not just in India but also in the Middle East markets.

Recently, L&T secured a landmark ultra-mega order from Qatar Energy, a global leader in LNG. According to L&T's management, this is the largest single contract the company has ever received.

Meanwhile, L&T's hydrocarbon business order book exceeded Rs 1 trillion.

L&T's financial services business has become one of the largest among its peers.

On the green energy side, L&T Electrolysers emerged as a successful bidder for tranche-I of the PLI scheme.

The data center at Panvel, a pilot project by L&T, has gone live with a capacity of 1.4 MW in the Mumbai region.

L&T Semiconductor has become vital player in semiconductor chip design.

Its pivotal position across several sectors did not allow this near monopoly infrastructure major to become one of the biggest gainers of the sharp bull run in 2024.

Rather, near term concerns about order book execution and margins made L&T a forgotten bluechip, even as smaller untested players fetched PE ratios in excess of 100.

The first half of FY25 was muted for the engineering company as subdued government spending in an election year weighed on domestic order prospects.

In the second half of FY25, there were concerns of muted order inflows from the Middle East market due to declining crude oil prices.

On its part, L&T has maintained its operating margin guidance for the financial year. However, large order wins, which are often margin-dilutive, pose a concern.

Here, L&T will need to strike a balance between higher-margin gas/LNG contracts and lower-margin renewable projects.

Given its huge order backlog which stood at Rs 5.6 trillion as of end of December 2024, timely execution has always been vital for L&T. However, one must also keep in mind that execution in certain sectors like defence are bound to be as per supply chain dynamics.

Here too, L&T has done reasonably well.

L&T's 45-acre defence manufacturing facility at Pune bustles as assembly lines operate at full capacity. Across multiple floors, teams of technical experts and engineers compile naval and land defence systems. This includes the formidable Brahmos and Pinaka missile launcher systems.

These launchers are India's indigenous substitute to America's HIMARs (High Mobility Artillery Rocket System).

There is a reason why L&T won critical defence orders. The company has been involved in defence production since 1980s. It has been working closely with the Indian government and the armed forces to design, develop, and manufacture a wide range of defence products.

Its role in the defence industry includes designing and manufacturing armoured vehicles, artillery guns, rockets, missile systems, radars, electronic warfare systems, communication systems, among others.

The company has also played a crucial role in building naval ships and submarines for the Indian Navy.

In addition to its manufacturing capabilities, the company provides life support for its defence products.

It has significant investment in in-house R&D and has developed over 100 defence products through its own development efforts or by working together with DRDO.

Strong focus on research and development, as well as its close partnerships with the Indian Armed Forces and international defence companies, have helped it establish itself as a leading player in the Indian defence industry.

Yet the company wasn't in the limelight for being a private sector defence manufacturer like its PSU peers were.

Rigid acquisition processes and delayed government payments did not allow L&T to venture into defence exports as aggressively as it has done more recently.

Pinaka missile heads were reportedly exported to Armenia in 2022. Two South American nations are also looking to import Pinaka.

So, L&T may continue to take massive strides across various sectors, from green energy to defence to data centres. In doing so, the company could continue make its subsidiaries financially sound and robust to withstand cyclical shocks.

However, investors may need to be patient to see this forgotten bluechip stock fetch the fair valuation it deserves.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)