3 key reasons behind L&T’s Rs 9,000 crore mega share buyback, its first ever in history

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Updated: December 14, 2018 11:57:56 AM

L&T share buyback: India’s largest infrastructure major Larsen & Toubro has announced its first ever share buyback program in for 6 crore shares at up to Rs 1,500 a piece totaling to Rs 9,000 crore. We bring to you key reasons behind the buyback.

L&T share buyback: L&T has approved the share buyback for up to Rs 1,500 per share, implying a premium of 13% from Tuesday’s prices.

L&T share buyback: India’s largest infrastructure major Larsen & Toubro has announced its first ever share buyback program in history. The company has proposed to buyback 6 crore equity shares for a maximum of Rs 1,500 per share, totalling to Rs 9,000 crore. The share buyback has been pegged at a 13% premium to Tuesday’s closing price. L&T shares were trading at Rs 1,357.25, up by 0.4%. 

Taking stock of the buyback programme, Motilal Oswal said that it’s a positive for the company. According to the research firm, L&T has reiterated its commitment towards its five-year plan ‘Lakshya’ under which it intends to improve its RoE to 18% by FY21. “Buyback will also re-emphasize management’s commitment on: a) No large capex plans over the next few years, apart from Hyderabad Metro, b) divestment of non-core assets, and c) Tight control over NWC and resultant improved cash generation,” the firm noted. We take a closer look at what the company looks to achieve through the buyback. 

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Confidence on growth prospects  

“The primary reason for the buyback is because the space we’re in EPC infrastructure projects, heavy manufacturing and the service area that we’re predominantly in reaffirms our confidence in the country. Re-affirmation of the fact that we feel the company is doing well,” SN Subrahmanyan, MD & CEO of L&T told in an interview with CNBC TV18.

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Moving towards a asset light model

Subrahmanyan said that L&T is looking to move towards an asset-light model. “As an organisation, we’re moving away from the heavy asset model that we’re in, especially in the manufacturing area into some kind of an asset light model. The money we generate from EPC model is enough to look at the capex we need, the mergers and acquisition we need to make. Having done all that, we will still have surplus money with us,” he said in an interview to the channel, adding that L&T wants to return that to the shareholders.

Increase return on equity for shareholders

S N Subrahmanyan noted that L&T is looking to increase the return for its shareholders through this buyback. “One of the major reasons to do the buyback is also to increase the return on equity. As you can see, we are a fairly heavy net-worth company. EPC business is a tough one, and the margins are not that great like other sectors,” Subramanian explained. There are risky contracts, involving cost and have to be performed in time inorder to make money. The result you see is that we are at 5.5%-6.5%, and we don’t expect to see any drastic change. My view is that the margin will go up, but it will take 2-3 years to do that. The net worth continues to grow as the reserves keep building up. I’m optimistic that RoE is on track to hit 18% in the next 2 years.

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