Analysts keep faithin L&T despite buyback proposal

Analysts remain bullish on Larsen & Toubro (L&T) and have maintained a “buy” rating on the stock, despite the company’s buyback proposal. The company, at its meeting on Thursday, approved a proposal to buy back up to 60 million equity shares at a maximum price of ~1,500 per equity share, for a total amount of ~90 billion.

The buyback proposal, analysts observe, is a way of paying back the shareholders in the absence of any major business investment on the horizon. This, they feel, is also directionally in line with management’s stated strategy of focusing on return on equity (RoE) and staying asset-light.

“L&T reiterated its focus on creating an asset-light structure, which has been apparent in the management's actions / decisions over the past few quarters. Besides exit from the switchgears business, L&T does not foresee any large non-core exits immediately,” point out analysts at Edelweiss Securities, while maintaining a “buy” rating on the stock with a target price of ~2050.

Though analysts at Nomura peg the loss of other income at ~4 billion in 2018-19 on account of the recent buyback proposal, they estimate an improvement in ROE by 100 - 150 basis points (bps) over FY19-21, thus implying the buyback would act as value accretion.

They expect another buyback — possibly in 2019-20 — when the company realises ~140 billion in cash proceeds on completion of the sale of its electrical and automation (E&A) business.

“The deal is guided to be completed in calendar year 2019 (CY19), according to the management, and hence we could witness a large special dividend or another large share buyback in 2019-20 or 2020-21,”

said Amar Kedia and Priyankar Biswas of Nomura in a recent report. They maintained a “buy” rating on the stock, with a target price of ~1,593, which is nearly 18 per cent higher than the current market price, and around 6 per cent higher than the proposed buyback price.

Till now in CY18, L&T has gained nearly 7.6 per cent as compared to 2 per cent fall in the S&P BSE Capital Goods index. The S&P BSE Sensex has, however, moved up nearly 13 per cent during this period, ACE Equity data reveal.

As regards to the fundamental / operational performance, analysts at Jefferies observe L&T is on a strong footing. They, too, have given a “buy” rating on the stock, with a target price of ~1,925. The company had reported 36 per cent year-on-year (y-o-y) rise in its consolidated net profit in the June quarter at ~12.14 billion.