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  • Stock recommendation: Larsen & Toubro Ltd – BUY – Buyback Price Rs.1520

    Publish date: August 24, 2018

    Buyback Offer

    L&T's buyback announcement is in line with the company's endeavor to enhance its Return of Equity. We see the buyback as a positive signal regarding the current valuations and the future outlook

    L&T Buyback Details

    • In the board meeting held on 23rd Aug 2018, L&T has announced further details of its buyback programme.
    • It will buy back up to 60 mn shares i.e. up to 4.3% of the paid-up equity capital.
    • The buyback is proposed to be made under the tender offer route.
    • The company has announced a buyback price of up to Rs 1,500/share, ~21% and 11% premium to the closing price of the day of buyback announcement and yesterday's close respectively.
    • The buyback would entail an outlay of Rs 90 bn, which is 18% of the standalone net worth. Since the outlay is more than 10%, the company would need to shareholder approval for buyback.
    • As of March 2018, on a standalone basis, the company had a gross debt of Rs 105.6 bn and cash and treasury investment of Rs 53.8 bn. Thus, the debt/equity ratio stands at 0.1x. Hence, the buyback programme would result in an increase in the debt/equity ratio to 0.3x, which in our view is manageable. Further, the company should be able to generate free cash of ~ Rs 40-45 bn in FY19E, which will further mitigate the impact on the balance sheet.
    • We expect a minor drop of 3.3% in EPS in FY20E due to the buyback.
    • On the positive side, the buyback should potentially improve the ROE by 90 bps in FY20E.

    Rationale for Buyback

    While the buyback has a dilutive effect on earnings per share, we believe it makes sense on account of the below.