Buyback Offer: Larsen & Toubro Ltd - BUY - Buyback Price Rs.1500

L&T's buyback announcement is in line with the company's endeavor to enhance its Return of Equity. We see the buyback as a positive signal regarding the current valuations and the future outlook.

L&T Buyback Details

- In the board meeting held on 23rd Aug 2018, L&T has announced further details of its buyback programme.
- It will buy back upto 60 mn shares i.e. upto 4.3% of the paid-up equity capital.
- The buyback is proposed to be made under the tender offer route.
- The company has announced buyback price of upto Rs 1,500/share, ~21% and 11% premium to the closing price of the day of buyback announcement and yesterday's close respectively.

- The buyback would entail an outlay of Rs 90 bn, which is 18% of the standalone net worth. Since the outlay is more than 10%, the company would need to shareholder approval for buyback.

- As of March 2018, on standalone basis, the company had a gross debt of Rs 105.6 bn and cash and treasury investment of Rs 53.8 bn. Thus, the debt equity ratio stands at 0.1x. Hence, the buyback programme would result in an increase in debt/equity ratio to 0.3x, which in our view is manageable. Further, the company should be able to generate free cash of ~ Rs 40-45 bn in FY19E, which will further mitigate impact on balance sheet.

- We expect minor drop of 3.3% in EPS in FY20E due to the buyback.
- On the positive side, the buyback should potentially improve the ROE by 90 bps in FY20E.

Rationale for Buyback - While the buyback has a dilutive effect on earnings per share, we believe it makes sense on account of

- We expect the buyback to enhance ROE of the company. It will enable the company to move closer to the target ROE of 18% by 2021.

- Sizeable capacity in most manufacturing verticals amid tepid demand conditions leading to modest capex needs in the medium term

- In the recent years, the company's focus has been on monetizing its various investments viz Dhamra Port, Kattupalli Port and REITs.

Recommend BUY: On forward earnings basis, L&T is trading at 22.2x and 19.4x FY19E and FY20E earnings respectively.

- In the recent quarters, the company has demonstrated good traction on the execution front.
- In terms of order intake, the company has started on a good note in the current fiscal.
- We remain positive on the company's endeavor on improving its ROE through divestments and limiting its role as a EPC contractor.
- We maintain our target price of Rs 1520 (unchanged) on the stock, valuing it at 21x FY20 earnings. Due to adequate upside, we upgrade rating to "BUY".

Shares of LARSEN & TOUBRO LTD. was last trading in BSE at Rs.1342.8 as compared to the previous close of Rs. 1352.5. The total number of shares traded during the day was 306642 in over 10260 trades.

The stock hit an intraday high of Rs. 1363.6 and intraday low of 1341. The net turnover during the day was Rs. 414910736.

Source : Equity Bulls

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