Larsen & Toubro will keep on delivering stellar returns in India’s stock market boom

In addition to a strong home market, L&T is benefiting from a surge in new contracts from Saudi Arabia. This is not only coming from oil and gas projects but in areas such as solar power, power grids, water treatment and transportation. Saudi

Arabia is expected to spend a whopping $3.3 trillion on infrastructure projects between 2021 and 2030.

Buoyant end markets have been reflected in L&T’s financial results. At the end of December 2023, it had an order book of $56bn which is more than twice its current annual revenues. 

For the year to March 2024, order inflows are expected to grow by more than 20pc with revenues growth in high-teens percentages. Earnings per share (EPS) is expected to grow by a very healthy 27pc on a US dollar basis.

As well as strong growth, the quality of L&T’s profits has the potential to improve. Construction is typically a very low profit margin business with a large proportion of fixed price contracts. While L&T has been good at managing its costs, its profit growth is coming from strong order growth rather than fatter margins.

While this is no bad thing, management is trying to change this by targeting higher margin technology and green energy infrastructure work.

The company is investing in India’s undeveloped data centre infrastructure. The country needs to build to cope with the strong growth in cloud computing and internet connectivity.

L&T has recently made and installed its first one megawatt electrolyser at a green hydrogen facility in India. It is now gearing up electrolyser manufacturing capability to tap into the expected strong growth in green hydrogen in India over the next decade.

A more speculative investment is the move into semiconductors where India is looking to develop home-grown intellectual property. L&T has set up a separate business unit to design rather than manufacture semiconductors.

It has no intention of competing with the likes of Nvidia, but is looking at highly engineered, custom chips for automotive and industrial applications as well as ones capable of working at the extreme temperatures of the Indian climate.