Larsen & Toubro Ltd’s (L&T) shares have fallen nearly 8% over the past week in reaction to the conflict in the Middle East after Iran faced a joint attack by the US and Israel. The engineering company’s significant exposure to the region in terms of orders and revenues is bad news for its investors. There are worries about deferment or cancellation of new orders and execution delays in ongoing projects amid disruptions to shipping routes.
Over a decade ago, domestic projects had dominated L&T’s business, but the picture is different now. As on 31 December, 49% of its ₹7.33 trillion order book came from international markets, and India contributed the rest. The Middle East accounts for 75.5% of the international order book. For the nine months ended December (9MFY26), the Middle East contributed 33% of the ₹3.45 trillion order inflow and 34% of its ₹2 trillion consolidated revenues.
L&T’s order prospects pipeline for the March quarter (Q4FY26) stands at ₹5.92 trillion, including ₹1.26 trillion for the Hydrocarbon segment. The overseas market is expected to contribute a large part of this pipeline. “Given the ongoing hostilities, we see about 10% impact on the FY26 order inflow, basis the order prospect pipeline,” said Emkay Global Financial Services in a report on 4 March. “For L&T, 12,000-15,000 workers are presently working in the Middle East region. While it is difficult to assess the current situation, we estimate that L&T’s core earnings will be negatively impacted by 11-12% for FY27E/28E, assuming a three-month execution delay and low order inflow mainly in the hydrocarbon segment,” it added.
Rough waters
The ongoing conflict comes at a time when L&T has already been struggling with weak execution in recent quarters despite robust orders. The management had reiterated its FY26 revenue growth guidance of 15% while announcing Q3 results, anticipating “the customary ramp-up in project execution during Q4.” L&T’s projects & manufacturing Ebitda margin stood at 7.9% for 9MFY26 vis-à-vis the company’s target of 8.5% for the full year FY26.
Depending on the timeline and impact of the conflict, a potential threat to the margin persists. “A boom in the real estate segment in the UAE has resulted in cushioning the impact of Chinese competition,” said JM Financial Institutional Securities, adding, “In the event real estate slows down due to increased security concerns in the region, competitive intensity may increase, which can have margin repercussions.”
Over time, rising contributions from higher-margin segments such as hi-tech manufacturing (including defence systems, aerospace engineering and precision equipment) can support margin expansion. Hi-tech manufacturing’s order book of ₹37,900 crore as on 31 December reflects growing demand for advanced engineering capabilities. While hi-tech manufacturing contributed just about 5% of L&T’s Q3FY26 revenue, there is potential for faster growth in future.
For now, meaningful upsides in the stock, which hit a 52-week high of ₹4,440 on 24 February, could be limited amid the conflict and looming concerns on artificial intelligence (AI) hurting the valuation of its IT businesses. “With a constantly changing scenario in the Middle East impacting core EPC business and increasing risks for IT business from AI-led disruption, L&T is turning more into a ‘moving parts’ thesis from a ‘sum-of-the-parts’ thesis,” says Motilal Oswal Financial Services. The broking firm has adjusted its core business valuations to bake in the current volatile environment, arriving at a revised two-year forward target price of ₹4,400 (versus ₹4,600 earlier).