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  • L&T buyback: what do the experts say?

    Publish date: 23rd August, 2018


    Share buybacks have become the ‘in-thing’ at Dalal Street recently. From Tata Consultancy Services (TCS) to HCL Technologies, many companies have proposed to buy back shares from the public. Another major company making air-waves in this regard is Larsen & Toubro (L&T). The board of directors are said to meet and set the L&T buyback date of equity shares on 23 August.

    Here is the experts’ take on this story.

    Buyback estimate value

    If the engineering conglomerate goes through a board-approved route, the buyback amount can be upto 10% of shareholders funds. This is equal to Rs 4,900 crore or 2.7% of the current market capitalisation. Alternatively, the company can also seek a buyback through shareholder approval. In this case, the company can allocate a buyback amount of upto 25% (12,300 crore or 6.6% of market cap) of shareholders funds according to a report by Kotak Institutional Equities.

    Click here to find out about L&T Infotech Q1 results

    Significant quantum of buyback

    Over the past five years, L&T has generated free cash flows of Rs 12,500 crore. The company has a comfortable standalone debt-to-equity (D/E) ratio of 0.21. In consolidated terms, the company’s D/E ratio is 1.75. D/E ratio gives an indication of how much debt and shareholder’s equity is used by a company to finance its assets. A higher D/E ratio means that the company is using a greater amount of debt (bank loans) compared to investor financing. Given the comfort of leverage in the case of L&T, the total quantum of buyback could be quite significant.

    Business strategy focussed on RoE

    It is possible to assume that the L&T buyback share is a result of the divestment deal with Schneider Electric. In May 2018, L&T signed an agreement with Schneider Electric to strategically divest its Electrical and Automation (E&A) business. The company earned proceeds equal to Rs 14,000 crore through this deal.

    However, the company’s decision to conduct a share buyback is independent of this deal. The company aims to maintain a levered capital structure through the buyback. This is evident through the company’s long term strategy of reaching a Return on Equity (RoE) target of 18% by FY2021.

    Click here to know more about Return on Equity

    Conclusion

    Due to L&T buyback announcement, stock performed well as an immediate aftermath. The company’s share rose by 6.74% to close at Rs 1,323 on 20 August.

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