L&T buyback offer may be of Rs 12,300 crore; board to consider proposal on August 23

Larsen and Toubro’s (L&T) buyback proposal, which will be considered by the company’s board on August 23, could be of up to `12,300 crore based on its net worth, debt, cash and bank balances, and investments in securities, bonds and debentures. As on March 31, 2018, L&T’s net worth stood at ` 49,174.25 crore on a standalone basis, while its cash and bank balances, investments in securities, bonds and debentures stood at `17,425 crore on a consolidated basis, according to Bloomberg data. According to current regulations, a company cannot exceed 25% of its paid up capital plus reserves while offering a buyback.

The news of the company’s buyback plan, which was announced on Saturday, August 18, saw its share price rally on Monday, as it clocked its biggest single-day percentage gain since May 2016. It closed up 6.74% at `1323.95 on the Bombay Stock Exchange. If this buyback offer goes through, it will be the first-ever buyback offer made by the company. However, it may not be its last. According to analysts, the buyback offer will return excess capital to boost its return on equity, and it may not be the last one too. L&T has raised around `4,500 crore over the last 24 months by divesting some of its non-core assets, which analysts think it may return.

“A `4,500-crore return via buybacks shall add 85 basis points to its ROE. However, we believe this is not L&T’s last buyback as it has $2.1 billion in asset sales lined-up in FY20, which also may be returned,” analysts at CLSA observed in a recent note. Some of the key non-core assets divested by the company include the sale of Kattupalli port to Adani Ports (APSEZ) for `1,950 crore, the sale of its general insurance business to HDFC Ergo for `551 crore, initial public offerings of information technology and technology services business and putting five of its roads into InvIT.

In the recent past, cash-rich IT majors like Tata Consultancy Services (TCS) and HCL Technologies have been seen returning their surpluses to shareholders, through share repurchases. Buybacks have become the preferred route for companies to return wealth to shareholders, especially since dividend income, of over `10 lakh per annum, is taxable at 10% in the hands of all residents, domestic companies, trusts or funds except those established for religious, educational or charitable purposes. Buybacks are the process by which companies repurchase their shares from stakeholders. The bought-back shares are extinguished shrinking the firms’ equity base.

In 2017-18, IT companies drove up buyback offers to a 20-year high. In all, 59 companies completed their share repurchase offers worth a staggering `53,306.94 crore. Seven of these buyback offers were made by software services companies; they spent `44,984 crore or 84% of the total amount. The share repurchase of TCS, the country’s largest IT company by market capitalisation and revenue which concluded in May 2017, was the biggest of the past two decades. The IT major repurchased shares worth `16,000 crore.

The board of TCS on June 15 approved a proposal to another buyback of shares worth`16,000 crore. Earlier, Infosys completed a share repurchase programme worth `13,000 crore in December 2017. Apart from TCS and Infosys, Wipro completed its buyback worth `11,000 crore on December 2017. Mphasis, Nucleus Software, HCL Technologies and Mindtree are the other IT companies that bought back shares in FY18. L&T had reported a sharp 36% year-on-year jump in consolidated net profit of the company to `1,215 crore for the three months of April-June 2018, while the net sales for the quarter surged a good 18% y-o-y to `28,300 crore.

The company’s fresh order intake also surged a good 37% y-o-y to `36,142 crore on the back of government’s push to infrastructure development in India led to a strong tendering environment during the quarter. L&T’s order book as on June 30, 2018 stood at `2.72 lakh crore, up 3.4% on a y-o-y basis. Despite Monday’s rally, the stock has under-performed the benchmark Sensex with a gain of 5.3% so far in 2018. The Sensex rose 12.4% during the same period.