L&T cut to underperform by BofA as growth slows, upside seen limited

BofA Securities downgraded Larsen & Toubro (L&T) to "underperform" from "buy," maintaining a ₹3,700 price objective, citing limited upside after the stock's significant outperformance and current fair valuations. While the sale of its loss-making Hyderabad Metro project is expected to be EPS and RoE accretive, BofA identifies headwinds including a projected slowdown in domestic capital expenditure growth and risks to Middle East order inflows from subdued energy markets. The brokerage concludes that most positive catalysts are already priced in, limiting further valuation expansion despite strong earnings visibility.

Analysis

BofA Securities has downgraded Larsen & Toubro (L&T) to "underperform" from "buy," while maintaining its price objective at ₹3,700, citing that the stock's valuation is now at fair levels following a significant period of outperformance, including a 10% rally in the past two months. A key positive development is the divestment of the loss-making Hyderabad Metro project, which is expected to be accretive to both EPS and RoE; BofA has consequently upgraded its FY26-28 earnings estimates by 3-4%. The transaction removes an asset that incurred a ₹6.5 billion loss in FY25, and the exit is projected to improve returns by up to 25 basis points. However, BofA posits that this positive catalyst is already priced in and highlights two significant headwinds. Firstly, domestic capital expenditure growth is projected to slow materially from a 20% CAGR between FY21-24 to 11% over FY25-27. Secondly, L&T's increased exposure to the Middle East, with the region's share of its order book rising from 14% in FY20 to 37% in FY25, presents a risk as subdued crude prices could dampen order inflows. Despite projecting a strong 18% EPS CAGR through FY28, the brokerage concludes that further valuation expansion is unlikely.

Key Decisions for Investors

• Given the 'underperform' rating and the thesis that the stock is fairly valued after its recent run-up, investors holding the stock may consider trimming positions to realize gains.
• Potential new investors should note the unfavorable risk-reward profile, as the current market price of ₹3,730 is above BofA's price objective of ₹3,700, suggesting limited near-term upside.
• Monitor trends in both Indian domestic capex and crude oil prices, as these are the primary macro risks identified that could negatively impact L&T's future order inflows and disappoint consensus growth expectations.
• Recognize that while the sale of the Hyderabad Metro is fundamentally positive for earnings and returns, this catalyst appears to be fully reflected in the current stock price, limiting its potential as a driver for future appreciation.