Can L&T’s product segment boost profitability as semiconductor and industrial electronics gain scale?
Revenue from Larsen & Toubro’s core business of projects, products and manufacturing (PPM) increased by 20% year-on-year to ₹58,391 crore in the September quarter (Q2FY27). However, the PPM Ebitda margin narrowed 25 basis points (bps) to 7.03%.
Blame the projects segment, where the margin dipped 52 bps year-on-year to 6.3% even as revenue rose by 19% to ₹53,911 crore. In contrast, the product and manufacturing segment margin expanded by 226 bps to 15.8%. Thus, overall PPM Ebitda growth came in slower than revenue growth at 16% year-on-year to ₹4,104 crore. The management reiterated its margin guidance of 7.8% for FY27.
Project profitability suffered because of continuing cost pressures in water and effluent treatment projects. Mint’s calculations suggest that half of the margin drop, or 25 bps, in the segment came from such projects. Though there are some supply chain issues, they have been managed with existing inventory.
But the L&T management said during the Q2 earnings call that if the West Asia conflict continues, there could be some revenue deferment even if there is no revenue loss. A higher proportion of jobs below the threshold completion level in infrastructure and conventional energy segments also meant lower profit recognition.
It is likely that the influence of the product and manufacturing segment will continue to increase on overall profitability. Growth in L&T’s product business portfolio should get a boost when it begins semiconductor production over the next couple of quarters.
Also, its entry into industrial electronics in April is likely to gather steam with the start of commercial production of EV traction motors in Q3. So, Ebitda growth in the products and manufacturing segment could be faster.
Low net working capital
A positive surprise in Q2 was that net working capital (NWC) fell to 1.7% of revenue from 10.2% in Q2FY26 and 4.9% in Q1FY27. Lower NWC boosts return on capital employed and helps reduce net finance costs. The management said advances received from customers might have lowered NWC, but their guidance is for keeping it below 10% in FY27 as order execution picks up.
Order inflow and revenue growth guidance for FY27 was unchanged at 10-12% each. The management remains conservative in terms of order inflow guidance even after having achieved 22% year-on-year growth rate in H1. Besides, a healthy order pipeline improves order inflow prospects for H2.
L&T plans to scale up its AI data centre capacity to 110 MW over the next two years from an existing 30 MW facility near Chennai. The management has not commented on capex for this yet. However, based on Nomura Research’s estimate of ₹110 crore per MW for AI data centres, it could require incremental investment of about ₹8,800 crore for the additional capacity.
Strong Q2 execution and order inflows cheered investors. L&T’s shares rose 4% on Wednesday. After deducting the value of subsidiaries, based on the current market capitalization post-holding company discount at ₹1.25 trillion, L&T’s net market capitalization comes to ₹4 trillion.
Based on FY28 estimates of Motilal Oswal Financial Services and Nuvama Institutional Equities, L&T’s PPM business trades at a price-to-earnings of 23x-25x. While a strong order book has always given revenue visibility for L&T, the street will watch how the semiconductor, industrial electronics and AI data centre businesses shape up.