L&T stock stands unscathed after Sebi rejects Rs 9,000-cr share buyback

Shares of Larsen & Toubro (L&T) ended marginally lower on Monday after the Securities and Exchange Board of India (Sebi) turned down its Rs 9,000-crore share repurchase proposal. 
 

The stock declined over three per cent in opening trade but later pared the losses to end just 0.31 per cent lower at Rs 1,314.

Market players said the rebound in the stock price was on hopes that the engineering giant may dole out higher dividend in lieu of a buyback. Meanwhile, analysts maintained their target price for the stock despite fears of impairment in return on equity (ROE) following cancellation of the buyback.

Credit Suisse, JP Morgan, Jefferies, Macquarie and Nomura retained their ratings and target prices on L&T despite the Sebi move, Bloomberg data showed.

“Due to the limitation on the buyback as a result of Sebi’s decision, a special dividend remains a viable alternative for returning wealth to shareholders. The company’s profits for FY18 plus overall retained earnings from previous financial years make this option relatively more feasible under the current circumstances,” Nomura said in a note on Monday.

On Saturday, L&T, in a statement to the stock exchanges, said the market regulator has asked it not to proceed with the buyback offering as it was not in compliance with Sebi norms.

After the buyback, the company’s consolidated debt would have been more than twice that of the paid-up capital and free reserves, higher than Sebi’s mandated level.
 

L&T had even set the cut off (ex) date to determine shareholder eligibility for the buyback and set the repurchase price at Rs 1,475 a piece. Sebi’s cancellation of buyback was on account of difference in interpretation of the law, said company sources and analysts.

L&T had considered standalone FY18 financial statements. However, Sebi had considered consolidated financials, which include finance debt of Rs 7.37 trillion and development projects debt worth Rs 1.56 trillion. Nomura said cancellation of buyback could impact L&T’s ROE by 150 to 165 basis points.

“The management has a long-term ROE goal of 18 per cent, and the buyback would have enabled L&T to achieve 17.6 per cent ROE by FY21, according to our estimates. Thus, the scrapping the buyback poses a near-term challenge to progress on the ROE goal,” the note said.

CLSA, in its note, said the buyback rejection won’t impact L&T’s ROE expansion drive. The brokerage said L&T could now approve “one-time large dividend of Rs 53 per share.”

The company’s board meeting is scheduled for Friday where it will announce its December quarter (Q3) earnings. 

Better-than-expected core performance in Q3 may assuage concerns, said a note by JP Morgan. Both JP Morgan and Nomura said there wasn’t much scope for L&T to reduce the size of the buyback.