First buyback can bring cheer to L&T's shareholders, say analysts

Analysts say pricing is key to sustain interest in L&T stock

Buybacks are announced for a host of reasons, sometimes for the promoter to bump up his/her stake, or in lieu of a dividend or just to improve the return ratios. With Larsen & Toubro (L&T), analysts say, there could be more than one compelling reason behind the buyback plan.

For one, many are of the view that buyback may be an effective tool to increase the return profile. Analysts at CLSA estimate an 85 basis point increase in the company's return on equity (ROE) after the buyback. ROE, in fact, is already on a steep mend — thanks to L&T’s efforts to enhance its business profile by reducing some less-profitable businesses. The ratio has improved from 9.7 per cent in FY16 to 13.7 per cent in FY18. 

The Street expects L&T to record an ROE of 14-15 per cent by FY20. Buyback could hasten the process of touching the 15-per cent ROE mark - a level last seen nearly a decade ago. 

Very few alternatives available for effective cash deployment could also be another reason for the buyback. 

Analysts at Motilal Oswal Financial Services say no large capital expenditure plans over the next few years, apart from Hyderabad Metro and asset divestments, could have prompted L&T to mull over a buyback plan. It will also add to cash balances. 

While finer details on the buyback will be out on Thursday, the brokerage pegs its size could be around Rs 50-56 billion — nearly 3 per cent of its market cap. 

This could hence be among the most significant buyback programmes Corporate India has seen in the past two years, thus explaining the over 6 per cent gain seen in L&T stock price. With this, Sanjeev Zarbade, vice-president, research, Kotak Securities, says sentiments should turn positive for L&T stock. 

"I am quite surprised to the see the stock underperforming in the broader markets in the past six months, especially when most large-caps are doing good. L&T has been strong with its financials, and guidance is also assuring," Zarbade points out. 

"The negative impression that investors have should start changing with the buyback," he adds. Experts observe that as recent buybacks are priced at 15-20 per cent premium to market price, L&T, too, could follow the trend, thus keeping the counter buzzing in the near-term.