L&T buyback: Will it continue to propel the stock higher?

India’s largest engineering company, Larsen & Toubro (L&T), plans to pay more cash to shareholders by buying back up to Rs 10,000 worth of shares through buybacks.
The engineering group’s board of directors approved the proposal to buy back 3.33 million shares, representing 2.4% of the total paid-in share capital, at a provisional price of Rs 3,000/share, the maximum. that L&T expected at the time. This offer represents a 17% premium over the July 25 closing price of Rs 2,561.95.
After receiving shareholder approval for the takeover, L&T will decide the final date and price, the infrastructure giant’s chief financial officer, R Shankar Raman, said on a conference call. after earnings with the media.
Increase profits? Raman added that the takeover is part of L&T’s return on equity (RoE) improvement under the group’s “Lakshya 2026” plan. The takeover is expected to boost L&T’s earnings per share (EPS) and return on equity (RoE), according to an analyst at an offshore brokerage. Analysts forecast an improvement in ROE of 40-60 basis points (bps), while EPS could be revised up slightly by only 4-5%.
When a company buys back its own shares, it reduces the number of shares outstanding. As a result, the company’s earnings are distributed to fewer shares, which automatically increases the company’s EPS. Return on equity will also improve because there are less
“This acquisition will likely help the company achieve its strategic target of 18% ROE by fiscal year 2025-26,” said ICICI Securities.
Even Nuvama Institutional Equities thinks the takeover is a welcome surprise.
Sonam Srivastava, founder and fund manager at Wright Research, said the group’s move signals confidence in future growth and a perception that its shares are undervalued.
“This may support the stock price in the short term, but in the long term its performance will be driven by capital allocation policy. If the company can deploy capital to generate higher growth and better earnings quality, the stock should see good compound growth,” she said. As of June 30, 2023, L&T’s liquidity is around Rs 40,000 to 45,000 on a consolidated basis.
Broker Reviews

Buybacks are largely priced into the share price. What will now lift the stock or make it ripe for new ratings is a divestment from non-core assets like Hyderabad Metro or Nabha Power. Kotak Institutional Equities believes L&T stock is 28 times more expensive and 23 times its one- and two-year forward earnings.
However, Prabhudas Lilladher is optimistic about the prospects of a technical major. He believes L&T is well positioned to benefit in the long term due to a number of factors, including strong bidding opportunities, better domestic order conversion, and significant increases in hydrocarbon and renewable energy orders. from international markets such as Saudi Arabia and the expected increase from the private market. invest in the domestic market.

Major EPC saw an order flow of Rs 65,500, up 57% year-on-year (YoY) in the first quarter of fiscal 2024, pushing the order book towards the end of June 2023. to a record high of Rs 4.1 trillion, about 2.3 times its revenue in the financial year 22-23. The domestic market accounts for 71% of these, with the remainder made up of international trade.
management comment

Management maintains revenue growth forecast of 12-15% and order growth target of 10-12%. Raman said on the conference call that L&T will likely pass its revenue and orders guidance for 2023-24, and may consider revising its revenue and operating margin guidance. after the October-December 2023 quarter.
He said L&T orders are expected to decrease in the second half of 2023-2024 due to the upcoming general election in India from April to May 2024. “We will have to be on the lookout for a slowdown in order flows due to the upcoming general election and possible subsequent government plans to take over,” Raman said.