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
CLSA On Share Buyback
Jefferies On Buyback
FY21 Lakshya (announced in 2016)