Capital Goods · investment research
Larsen & Toubro
LT
Verdict
WATCHLIST
medium confidence · 3-5 years
Composite score
60/100
Weighted across all eight pillars
Business quality
65/100
Moat, returns, balance sheet, cash, management
Valuation score
31/100
At 69.5x against a sector median of 69.5x, the price embeds roughly 52% earnings growth. Anything less has to come out of the multiple.
Decision intelligence
Every conclusion states what would make it wrong
WHAT
Good business, wrong price. Track it and wait for a better entry.
WHY
- • Profitability & returns scores 79/100 (improving) — ROCE was 19.4% a year ago. Sustained ROCE above the cost of capital is what compounds value.
- • Business & moat scores 72/100 (improving) — Competition is largely on price; returns depend on execution and the cycle.
- • Industry & macro scores 70/100 (improving) — Capital Goods (India) demand is improving.
- • Valuation scores 31/100 (stable) — At 69.5x against a sector median of 69.5x, the price embeds roughly 52% earnings growth. Anything less has to come out of the multiple.
WHERE
Capital Goods · Large cap · position sized to at most 0% of an equity portfolio.
WHEN
Revisit if the price approaches ₹5,974 or earnings catch up with the multiple.
WHAT IF WRONG
- • The thesis is wrong if ROCE falls below 22% or cash conversion stays under 70% for two straight quarters.
- • Valuation support fails below ₹5,974 of fair value — a drawdown to that level is a re-underwrite, not automatically a buy.
- • Watched risk: Cyclicality — Capital Goods (India) earnings swing with the cycle, so trailing numbers flatter the peak.
WHAT NEXT
- • Read the latest quarterly cash-flow statement alongside the P&L.
- • Check Government capex — it moves the earnings base independently of execution.
- • Compare against the sector peers listed below before sizing anything.
Larsen & Toubro is a competitively exposed capital goods business compounding revenue at 7.2% and profit at 9.5%, earning 25.7% on capital. Quality scores 65/100 and valuation 31/100 at 69.5x. The decision is therefore watchlist with medium confidence — this is analysis for learning, not investment advice.
What does this business actually do?
Business understanding before ratios
Larsen & Toubro operates in the Indian capital goods sector with a large-cap footprint and a listed market value of about ₹484k Cr.
Revenue is earned across 4 reported segments; profitability is driven by realisations, mix and operating leverage rather than one-off items.
Revenue drivers
- • Volume growth in the core segment
- • Realisation / pricing power
- • Mix shift toward higher-margin lines
- • Capacity utilisation
Cost drivers
- • Raw material and input costs
- • Employee cost inflation
- • Depreciation from recent capex
- • Distribution and marketing spend
Moat · 56/100
No durable moat identified
Competition is largely on price; returns depend on execution and the cycle.
Segment mix
Growth 21.3% · margin 20.4% — Fastest growing part of the mix — watch whether margins hold as it scales.
Growth 25% · margin 16.8% — Fastest growing part of the mix — watch whether margins hold as it scales.
Growth 22.6% · margin 32.1% — Fastest growing part of the mix — watch whether margins hold as it scales.
Growth 16.7% · margin 9.1% — Growing broadly in line with the overall business.
Analysis pillars
Score, trend and the drivers behind each — no bare numbers
Business & moat
72/100Trend: improving · weight 14%
- MoatNo durable moat identified
Competition is largely on price; returns depend on execution and the cycle.
- Segment concentrationInfrastructure projects is 7.6% of revenue
Revenue is spread across segments, which softens single-market shocks.
- EBITDA margin31.0%
Margin moved from 19.0% to 31.0% year on year.
Profitability & returns
79/100Trend: improving · weight 16%
- ROCE25.7%
ROCE was 19.4% a year ago. Sustained ROCE above the cost of capital is what compounds value.
- ROE22%
Return on equity after leverage — read alongside debt levels.
- Net margin20.5%
Share of every rupee of revenue that reaches reported profit.
Growth quality
46/100Trend: improving · weight 15%
- Revenue CAGR (4y)7.2%
Top-line compounding over the reported history.
- Profit CAGR (4y)9.5%
Profit is compounding faster than revenue — operating leverage is working.
- Growth sourceCapex-led (organic)
Capex is 9.0% of revenue this year.
Balance sheet
57/100Trend: deteriorating · weight 12%
- Debt / EBITDA1.65x
Leverage is serviceable from current cash generation.
- Debt / equity0.55x
Capital structure relative to shareholder funds.
- Working capital44 days
Cycle is tight, so growth is largely self-funding.
Cash conversion
48/100Trend: stable · weight 13%
- OCF / PAT72%
Reported profit is backed by operating cash.
- Free cash flow₹5,681 Cr
Cash left after maintaining and expanding the asset base.
Management & governance
68/100Trend: improving · weight 14%
- Guidance delivery91% of last 8 quarters
Whether management historically delivered what it promised.
- Promoter holding48.8% (+1.36 y/y)
Promoter ownership is stable or rising.
- PledgeNo pledge
No pledge disclosed in the sample data.
- Institutional flowFII +1.04 · DII +1.95
Direction of institutional ownership over the last year.
- Capital allocationMost operating cash is reinvested into the core …
Most operating cash is reinvested into the core business.
Industry & macro
70/100Trend: improving · weight 8%
- Demand trendimproving
Capital Goods (India) demand is improving.
- StructureConsolidated
Consolidated — a few large players hold most of the profit pool.
- Competitive intensitylow
How hard it is to keep pricing and share.
- Macro driversGovernment capex, Private capex cycle, Commodity costs
Variables that move the earnings base regardless of company execution.
Valuation
31/100Trend: stable · weight 8%
- P/E vs sector69.5x vs 69.5x
At 69.5x against a sector median of 69.5x, the price embeds roughly 52% earnings growth. Anything less has to come out of the multiple.
- Growth-adjusted7.30 (PE/growth)
Below ~1.5 the multiple is supported by growth; above ~2.5 it depends on the market staying optimistic.
- FCF yield1.17%
Cash return on the current market value, before any growth.
Financial history
Profit, cash and returns over five reported years
| Year | Revenue | EBITDA | PAT | OCF | FCF | ROCE |
|---|---|---|---|---|---|---|
| FY2022 | ₹75,155 Cr | ₹21,043 Cr | ₹14,099 Cr | ₹9,023 Cr | ₹1,507 Cr | 20% |
| FY2023 | ₹81,149 Cr | ₹17,041 Cr | ₹8,521 Cr | ₹5,624 Cr | ₹-868 Cr | 24.4% |
| FY2024 | ₹87,143 Cr | ₹19,171 Cr | ₹12,461 Cr | ₹8,473 Cr | ₹630 Cr | 20.7% |
| FY2025 | ₹93,136 Cr | ₹17,696 Cr | ₹7,786 Cr | ₹5,450 Cr | ₹-3,864 Cr | 19.4% |
| FY2026 | ₹99,130 Cr | ₹30,730 Cr | ₹20,282 Cr | ₹14,603 Cr | ₹5,681 Cr | 25.7% |
No accounting-quality flags in the sample data.
Ownership & management
Who owns it, and have they delivered?
Promoter
48.8%
+1.36 y/y
Pledge
None
No disclosed pledge
FII
19.5%
+1.04 y/y
DII
6.6%
+1.95 y/y
Guidance delivered in 91% of the last eight quarters; average leadership tenure 20 years.
Most operating cash is reinvested into the core business.
- ⚠ Related-party transactions at 6.1% of revenue
- ⚠ Two auditor changes in the last five years
Industry & macro context
Capital Goods (India)
Demand trend
improving
Cyclicality
high
Competition
low
Regulatory pressure
high
Consolidated — a few large players hold most of the profit pool.
Macro drivers: Government capex · Private capex cycle · Commodity costs
Valuation
fair versus the sector
P/E
69.5x
Sector median P/E
69.5x
P/B
1.50x
Earnings yield
1.44%
FCF yield
1.17%
PE / growth
7.3
Estimated fair-value band ₹5,974 – ₹7,633 , built on FY2026 EPS of ₹147.5. Gap to the current price: +93.3%. Ranges are a modelling output, not a target price.
At 69.5x against a sector median of 69.5x, the price embeds roughly 52% earnings growth. Anything less has to come out of the multiple.
Risk register
What can break the thesis, and how it is monitored
- Cyclicalitymedium
Capital Goods (India) earnings swing with the cycle, so trailing numbers flatter the peak.
Monitor: Government capex
- Governancehigh
Related-party transactions at 6.1% of revenue; Two auditor changes in the last five years
Monitor: Annual report disclosures and auditor commentary.
Ongoing thesis monitoring
The thesis is a living position, not a one-time verdict
| Metric | Currently | Thesis holds if | Thesis breaks if |
|---|---|---|---|
| ROCE | 25.7% | stays above 23% | falls for two consecutive years |
| Cash conversion | 72% | stays above 80% | drops below 70% while revenue grows |
| Revenue growth | 7.2% CAGR | tracks the 52% priced in | slows for two quarters with no margin offset |
| Promoter holding | 48.8% | stable or rising | falls sharply or fresh pledge appears |
Peers in the same sector
Compare before sizing anything
Data quality 72/100
Stated openly, as required by the product principles
- • Fundamentals in this build come from a deterministic sample dataset, not licensed exchange filings.
- • Segment, ownership and management figures are illustrative and must be verified against annual reports.
- • Educational analysis only — not a recommendation to buy or sell any security.