Analysts keep faith in Larsen & Toubro despite buyback proposal

Analysts remain bullish on (L&T) and have maintained a ‘buy’ rating on the despite the company’s 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 Rs 1,500 per equity share for an amount of Rs 90 billion.

The proposal, analysts believe, is a way of paying back the shareholders in the absence of any major business investments 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.

reiterated the focus on creating an asset-light structure, which has been apparent in management’s actions/decisions over the past few quarters. Besides exit from the switchgear business, does not foresee any large non-core exits immediately,” point out analysts at while maintaining a buy rating on the with a target price of Rs 2050.

Though analysts at peg the other income loss at Rs 4 billion in FY19 on account of the recent proposal, they estimate an improvement in ROE by 100 – 150 basis points (bps) over FY19-21, thus implying the buyback would be value accretive. They expect another buyback – possibly in FY20 – when the company realises Rs 140 billion in cash proceeds on completion of the sale of the electrical and automation (E&A) business.

“The deal is guided to be completed in CY19, according to management, and hence we could witness a large special dividend or another large share buyback in FY20 or FY21," said Amar Kedia and Priyankar Biswas of in a recent report. They maintain a buy rating on the with a target price of Rs 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.

Thus far in the calendar year 2018 (CY18), 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 show.

As regards the fundamental/operational performance, analysts at believe L&T is on a strong footing. They, too, have a buy rating on the stock with a target price of Rs 1,925. The company had reported 36 per cent year-on-year (y-o-y) rise in its consolidated net profit in the April – June 2018 quarter at Rs 12.14 billion.

“Q1FY19 results reinforced our belief in an order book-driven execution pick-up. Healthy order flow and clarity on Hyderabad Metro’s potential losses are incremental positives. Order flow growth has been reasonable even in years. We believe marginal YTD underperformance to Nifty, despite being on track to meet guidance reflects an uncertain 2018 election outcome. This makes risk-reward favourable," said Lavina Quadros and Rahul Murkya, analysts tracking the company at in a note.

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