L&T shares shrug off buyback rejection; shares end marginally lower

Shares of Larsen & Toubro (L&T) on Monday ended marginally lower after market regulator Securities and Exchange Board of India (Sebi) turned down its Rs 9,0000-crore share repurchase proposal. The stock declined over three per cent in the 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 might doll out higher dividend in lieu of buyback. Meanwhile, analysts maintained their target price for the stock despite fears of impairment in return on equity (ROE) following cancellation of buyback.

Credit Suisse, JP Morgan, Jefferies, Macquarie and Nomura retained their rating and target price 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 divided 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 current circumstances, in our view,” Nomura said in a note on Monday.

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

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

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 included finance debt of Rs 7.37 trillion and development projects debt of Rs 1.56 trillion.

Nomura said cancellation of buyback could impact L&T’s ROE by 150 to 165 basis points.

“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 of the buyback poses a near-term challenge to progress on the ROE goal,” the note said.

CLSA in a 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 to announce its December quarter (Q3) earnings.

Better than expected core performance in the Q3 quarter may assuage concerns, said a note by JP Morgan.

Both JP Morgan and Nomura said that there wasn’t much scope for L&T to announce a reduced-sized buyback.

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