ET INTELLIGENCE GROUP: The stock of Larsen & Toubro (L&T) gained 6.7 per cent on Monday following the news of its first-ever share buyback. The company’s board will meet on August 23 to finalise the details of the offer. Analysts expect a few more buyback rounds from the country’s largest infrastructure company given the ample cash on its books due to recent sale of assets and its intention to improve the return on equity (RoE).The company raised nearly Rs 4,500 crore over the past eight quarters by divesting assets including IPO proceeds from L&T Infotech and L&T Technology Services, sale of the general insurance unit and the Kottupalli port. Its cash and equivalents rose to Rs 6,824 crore in FY18 compared with Rs 3,526 crore in the previous fiscal.In the five-year vision plan, the company has stated to pursue a light-asset approach. Given a few more assets such as Nabha Power Plant, InViTS for toll roads and stake sale in Hyderabad Metro on the block, analysts expect more buyback offers from the company in the coming quarters. These assets together are worth over $2 billion (approximately Rs 14,000 crore).According to the Companies Act, a company can buy back 10 per cent of the total equity (paid-up capital and free reserves) with the board approval and up to 25 per cent with shareholders’ approval. L&T’s total equity was Rs 48,776 crore in FY18, which means it can offer maximum buyback worth around Rs 12,000 crore.
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Analysts expect the company to limit the buyback amount to the current divestment kitty, which is around Rs 5,000 crore. This may increase the RoE by 85-90 basis points from 13.9 per cent in FY18. The company plans to improve the RoE to 18 per cent by FY21.At Monday’s closing stock price of Rs 1,324, if the company plans a buyback worth of Rs 5,000 crore, the acceptance ratio or the number of shares likely to be accepted for every 100 shares tendered will be 3.4 per cent. It will fall to 2.5 per cent if the buyback offer is at 10 per cent premium to the Monday’s stock price.Since there is no promoter holding in L&T, all shareholders are entitled to participate in the buyback. Mutual funds, foreign portfolio investors (FPIs) and insurance companies hold 15.4 per cent, 18.7 per cent and 21.7 per cent stakes, respectively, in the company. LIC is the largest investor with 17.9 per cent holding.On Monday, L&T’s stock traded at 20.3 times its 12-month projected earnings, a 10 per cent discount to its five-year average valuation.