Larsen & Toubro Ltd. Overweight: Middle-East Deal Removes Tail Risk; Increasing PT To Rs5060

Research evidence excerpt

Larsen & Toubro Ltd. Overweight: Middle-East Deal Removes Tail Risk; Increasing PT To Rs5060

moving material only where customers are

ready to compensate for higher logistics costs, otherwise adopting a wait-and-watch

approach.

Risk profile of Middle East book - more opportunity than risk - Major customers

have laid down major capital expenditure plans to expand capacity and the pipeline

should only strengthen. On commodity inflation in fixed price contracts, infra projects

have price adjustment provisions while energy projects (fixed lump sum) are open to

negotiation with customers. Biggest risk is supply chain (continuously getting better

with alternate routes opening), not inflation. Steel exposure (largest commodity

exposure) has been stable with a slight downward bias. Open commodity exposure is

only between bid submission and award; post-award, L&T hedges 90-95% through

quick orders, and pre-engineering and pre-bid agreements with contingency for the rest.

In renewables, price risk is largely passed on to the customer; even in Qatar contracts,

designated items have customer-borne price risk. FX risk is fully hedged through a

layered hedging process – margins are not impacted by exchange rate variations.

Kuwait projects update - Of the four L1 positions L&T was holding in Kuwait that

were earlier flagged, three were canceled and one has survived and is going through the

approval process. Re-tendering of the canceled projects is expected during the year.

Earlier in Q3FY26, management had clarified that the Kuwait orders were never part of

the order book - the cancelations occurred because actual bids were above the budget of

these national oil companies but these are strategically important projects which will

come back with minor tweaks.