Brokerages remain positive on L&T, buyback likely to ‘boost RoE’

Brokerages have retained positive view on construction and engineering firm Larsen & Toubro which on Thursday approved a share buyback worth up to Rs 9,000 crore, with analysts saying that the buyback will boost the company’s return on equity.

The company will buy back 6 crore shares at a price of up to Rs 1,500 per share, which is at over 13% premium to the stock’s closing price of Rs 1,322.15 per share. Shares of L&T ended down 0.7% at Rs 1,342.80 on Friday.

“The buyback may lower EPS by 2%, but it will improve quality of earnings. We believe this is not L&T’s last buyback, as it has US$2.1bn (billion) in asset sales lined up in FY20, which also may be returned,” said CLSA, retaining its ‘buy’ rating on the stock.

Maintaining a ‘buy’ recommendation on the stock, JM Financial expects L&T’s return on equity during FY19-FY20 period to rise to 14.5-15% from 13%-13.8% due to the share buyback.

Nomura Financial Advisory and Securities (India) also retained ‘buy’ with a target price of Rs 1,593, while Edelweiss has retained its ‘buy’ rating with a target price of Rs 2,050.

The buyback is a directionally positive step, indicating the management’s return on equityfocused approach to building an asset-light model.

Motilal Oswal said the company’s earnings growth in the current financial year would be impacted by 500 basis points at the consolidated level, assuming completion of the buyback, given the loss in other income on account of utilisation of Rs 9,000-crore of cash.

Most of the brokerages are positive on the stock, with 31 of the 37 analysts tracking the stock having a ‘buy’ rating on it, with consensus target price at Rs 1,606.56.