Why Has BoFA Downgraded L&T Despite Earnings Upgrades?
Larsen & Toubro (L&T), India’s largest engineering and construction conglomerate, has enjoyed a strong rally over the past two months, with its stock rising nearly 10%. While this outperformance reflects improving fundamentals and order flow visibility, it has also triggered valuation concerns. BoFA Securities has therefore downgraded L&T from Buy to Underperform with a revised target price of ₹3,700. Despite acknowledging positives such as the Hyderabad Metro exit and upgraded earnings estimates, BoFA believes near-term upside may be capped.
About L&T and BoFA’s Call
L&T is a diversified multinational engaged in EPC (engineering, procurement, and construction), infrastructure, power, hydrocarbon, and IT services. The company has been at the forefront of India’s infrastructure boom, benefiting from both government-led projects and private capex recovery. BoFA Securities’ latest downgrade reflects a view that after strong price appreciation, the risk-reward balance has shifted, limiting further near-term upside potential despite improving earnings visibility.
Hyderabad Metro Exit: A Positive Catalyst
One of the notable developments for L&T has been its exit from the Hyderabad Metro project. This has been earnings and return-on-equity (ROE) accretive, reducing a drag on financials. With this exit, BoFA has raised its earnings estimates for FY26–28 by 3–4%, reflecting better profitability and reduced capital intensity. The move is also expected to free up resources for higher-return opportunities across L&T’s diverse business portfolio.
Future RoE Expansion Drivers
BoFA acknowledges that L&T still has levers for further ROE expansion. These include the potential for buybacks given a $2.6 billion cash surplus, margin improvements through operational efficiencies, and better working capital management. However, the brokerage highlights that incremental gains will be tougher to achieve after recent improvements, suggesting that future growth may be more measured rather than exponential.
Risks on the Horizon
BoFA points to two primary risks for L&T going forward. First, a slowdown in domestic capex could hurt order inflows and execution. Second, lower crude oil prices could weigh on hydrocarbon project economics, reducing opportunities in L&T’s energy business. While the company’s diversified portfolio provides resilience, external macro factors remain a risk to earnings momentum.
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Valuation View and Investor Implications
Despite the downgrade, BoFA does not dismiss L&T’s long-term structural story. The company remains central to India’s infrastructure growth, backed by strong order book visibility. However, after the recent rally, valuations have become less attractive, prompting BoFA to advise caution. The ₹3,700 target price suggests limited near-term upside from current levels. Investors may need to adopt a wait-and-watch stance, looking for better entry points.
Investor Takeaway
L&T continues to benefit from structural drivers such as infrastructure expansion and government capex. The Hyderabad Metro exit strengthens earnings and ROE outlook, while future levers like buybacks and margin gains remain in play. However, BoFA’s downgrade underscores concerns about valuations after the recent price surge. Investors may treat this as a reminder that even strong companies face limits when price appreciation runs ahead of fundamentals. More expert commentary and insights can be accessed at Indian-Share-Tips.com, which is a SEBI Registered Advisory Services.
SEBI Disclaimer: The information provided in this post is for informational purposes only and should not be construed as investment advice. Readers must perform their own due diligence and consult a registered investment advisor before making any investment decisions. The views expressed are general in nature and may not suit individual investment objectives or financial situations.
