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L&T share buyback to boost company's RoE, triggers investors confidence

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L&T share buyback to boost company's RoE, triggers investors confidence

L&T share buyback to boost company's RoE, triggers investors confidence
Shares of Larsen & Toubro (L&T) saw an upmove of 9 percent this week as the first-ever share buyback announcement boosted investor confidence. The company is looking to buyback six crore shares at the maximum price of Rs 1,500 a piece.
The management said that the Rs 9,000 crore buyback would not only boost L&T's return on equity (RoE) but also reaffirms the company's confidence in its ability to execute its strong orderbook.
As of March 18, L&T had a cash and bank balance of Rs 8,000 crore and additional investments worth Rs 9,500 crore giving it adequate liquidity. The company is also looking to monetise non-core assets which have a potential to generate an additional $2.1 billion for the company.
According to brokerages like Jefferies, the 4.3 percent equity buyback announcement is marginal and positive as it increases confidence in management delivering on its commentary. The current market price gives downside support with strong upside prospects, said Jefferies.
Despite a steady performance in Q1, L&T has been one of the key underperformers in the largecap space this year as uncertainty arose due to elections in various states.
The company's management admitted that FY19 looks challenging due to the general election and state elections. L&T is hopeful that that delay in decision making will be factored Into FY19 order inflow guidance.
Hence, the management not only maintained the FY19 revenue and order inflow guidance but also said that it is on track to achieve the 18 percent RoE target in a year or two. Global brokerage CLSA also believes that buyback move could boost its RoE by 190 basis points and expects the company to announce more buybacks as it moves forward with its divestiture plans.
L&T is currently trading below its eight-year average valuations and the buyback is expected to not only boost its RoE but also create a floor for the stock.
10 key takeaways from discussion with management
  1.  The buyback is the reaffirmation of the company’s ability to generate cash and execute orders.
  2.  The buyback is to improve RoE, said the company. The RoE is on track to reach 18 percent level in a year or two.
  3. L&T will maintain revenue growth and order inflow guidance for FY19.
  4. Delay in decision making in election related matters factored into FY19 order inflow guidance.
  5. FY19 is challenging due to the general election and state elections.
  6. Much of private capex is flowing through brownfield expansions or acquisitions.
  7. Yet to see a meaningful pickup in greenfield private capex.
  8. Might not see any big asset sale in CY18.
  9. Monetising non-core assets to fund other businesses.
  10. Need Competition Commission of India's (CCI) approval for the sale of electrical and automation (E&A) business. Expect all approvals soon.
  11. CLSA On Share Buyback 
    • It can boost RoE, slightly lower earnings per share (EPS) but improve its quality.
    • The move could boost its RoE by 190 bps.
    • A credible strategy to improve both growth and RoE.
    • This is not the last buyback.
    • L&T has an active pipeline of divestitures of $2.1 billion.
    • Jefferies On Buyback
      • Reiterate buy call, target at Rs 1,925 per share.
      • Q1 results reinforced our belief in an order book has driven execution pick-up.
      • Healthy order flow and clarity on Hyderabad Metro's losses are positives.
      • May see a marginal year-to-date underperformance in Nifty.
      • Buyback points to management's confidence in the outlook.
      • Current valuations give downside support with strong upside prospects.
      • FY21 Lakshya (announced in 2016)
        • Double revenues over five years.
        • Expand margins by 100-120 basis points to over 11 percent.
        • Reduce working capital by 6 percentage points to 18 percent.
        • Improve return on equity by 6 percentage points to 18 percent.
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