Event update: Larsen & Toubro (Neutral) - Share buyback to drive 160bp ROE expansion
Event: L&T has approved share buyback aggregating to Rs90bn
Details
The buyback has been approved for 60m shares at a maximum price of Rs1500/share, totalling to Rs90bn. The share buyback accounts for 4.29% of the paid-up equity share capital of the company.
The buyback will be on a proportionate basis under the tender off route on the stock exchanges. The specific buyback price will be determined by the company at a premium over the two-week average closing prices, subject to maximum of Rs1500/share.
L&T had set for itself a target to improve ROE to 18% by 2021 (13.9% in FY18) through various means including monetization of assets and sale of non-core businesses. The company has been on asset monetization spree over the last 24 months through monetization of i) Real estate ii) Kattupalli Port and iii) five road assets through sale to InvIT as well as OFS in L&T Infotech and L&T Technology Services. Further, L&T has also been constantly striving to lower its working capital intensity (~20% currently from the peak of ~24% in FY16) while not committing further equity for infrastructure assets from its parent balance sheet.
L&T’s current decision to undertake a sizeable share buy-back of ~Rs90bn, which is almost equal to its free cash and equivalents and current investments of Rs92.5bn on standalone basis as on Mar-18, is a bold decision to move closer to its ROE improvement target.
Our View
We estimate only a miniscule (0.5%-1%) reduction in L&T’s FY19E/FY20E consolidated earnings due to the proposed Rs90bn share buy-back, with the reduced interest/dividend income being largely offset by the equity reduction. The ROE, meanwhile, is likely to improve by 160bp in FY20 to 16.1% from our earlier estimate of 14.5%. This is a key positive outcome of the share buy-back decision. Valuations, however, at 25.0x/20.6x appear to be pricing in these upsides even as earnings risks persists due to slower than estimated execution of projects. Maintain Neutral with a revised price target of Rs1486.
Larsen and Toubro is engaged in the following business segments: Engineering & Construction; Electrical & Electronics; Machinery & Industrial Products; and Other. Engineering and construction segment comprises execution of construction projects in civil, mechanical and electrical engineering. Electrical and electronics segment comprises the manufacture and sale of switchgear, petroleum dispensing pumps, and medical equipment. Machinery and industrial products segment comprises the manufacture and sale of industrial machinery and equipment. Other segment includes property and software development, generation of power for consumption by Haldia Petrochemicals Limited, and financial services.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.