L&T’s Strategic Move: Launching the First-Ever Buyback in 2023
In the company’s 85-year existence, this is the first time shares have been repurchased. The company’s board had previously authorized a repurchase of up to 4.29% of its paid-up equity capital, or nearly Rs 9,000 crore, in August 2018.
The first-ever share buyback in the history of engineering and infrastructure group Larsen & Toubro (L&T) will be requested, as well as approval for a special dividend for FY24. At its meeting on July 25, the company’s board will ask permission for the repurchase and special prize. If granted, L&T stated in a regulatory update that the dividend’s record date would be August 2. However, the company did not mention the share buyback’s specifics, such as the number of shares it plans to purchase or the cost involved. In the company’s 85-year existence, this is the first time claims have been repurchased.
The company’s board had previously authorized a repurchase of up to 4.29% of its paid-up equity capital, or nearly Rs 9,000 crore, in August 2018. However, the market regulator Sebi rejected the plan, citing compliance difficulties as the reason why. Following the repurchase, the Sebi had also expressed worries about debt growth on its books. Later, L&T abandoned the project. Compared to FY22, L&T’s consolidated net profit increased by 20.3% to Rs 12,531 crore during FY23. As part of its “Lakshya 2026” programme, L&T sold a 51% share in Infrastructure Development Projects in December 2022. The company was also considering “certain exits” for FY24.
A capex budget of Rs 5,000 crore has also been set aside by the corporation for FY24, which includes expenditures in a data centre and an electrolyzer plant. Separately, L&T said that its board had authorized the merger of L&T Innovation Campus (Chennai), or (LTICCL), with L&T Seawoods, or (LTSL), a wholly-owned subsidiary. The statement added that LTICCL would no longer be a subsidiary of the firm after the merger, which is subject to regulatory clearances.
LTICCL has no income and an equity share capital of Rs 7 crore. Three owned subsidiaries of the company have yet to start conducting business. Following the merger, LTSL would acquire a 100% ownership stake in LTICCL and its subsidiaries. A wholly owned subsidiary, LTSL has a net worth of Rs 2,500 crore.
As India’s most significant construction and engineering conglomerate, Larsen & Toubro Limited (L&T) has always been at the forefront of India’s infrastructural evolution. L&T has become synonymous with trust, innovation, and excellence, with a legacy spanning over eight decades. Adding another first to its impressive list, L&T recently announced its first-ever share buyback program in 2023, a landmark decision set to redefine the corporate financial landscape of India.
As indicated by L&T’s top management, this unprecedented move represents a strategic pivot to enhance shareholder value and optimize capital allocation. It further exhibits the organization’sorganization’s confidence in its intrinsic value and its commitment to generating superior returns for its shareholders.
A share buyback, or a repurchase, is a strategy wherein a company buys back its shares from the marketplace. The rationale behind this strategy varies, often associated with internal or external factors like company performance, market conditions, or regulatory environment.
Generally, buybacks occur when a company perceives its shares as undervalued and believes it can invest in itself to boost future performance. When a company engages in share buybacks, they decrease the number of shares available for purchase in the open market. This results in an increase in earnings per share, which can improve the value for the shareholders who still hold shares in the company.
The decision to initiate a buyback comes after a period of robust performance and healthy cash flow generation by L&T. Despite challenging conditions imposed by the global pandemic, and the company has managed to retain its stronghold in the engineering, procurement, and construction (EPC) sector, showcasing resilience and innovative problem-solving.
The company has indicated that the excess liquidity on its balance sheet, aided by successful project execution and cost optimization strategies, is a significant driver for this buyback. The buyback reflects L&T’s goal of efficiently using surplus cash to enhance shareholder value rather than holding it as low-yielding money or equivalents.
Furthermore, L&T’s management has voiced its belief in the company’s undervaluation in the stock market. This buyback announcement is expected to serve as a signal to the market, reflecting management’s confidence in the business and its prospects.
Market analysts expect this move to have positive repercussions for investors. A decrease in outstanding shares usually boosts earnings per share, possibly increasing the company’s share price. Current shareholders can sell their shares at a higher price than the current market value, which could be a profitable opportunity for them to exit their positions.
The buyback also underlines L&T’s robust financial health, which could attract more investors and strengthen the company’s market position. It reinforces the company’s commitment to driving shareholder value and its confidence in its growth trajectory, which may positively influence investor sentiment and trust.
The announcement could also set a precedent for other cash-rich companies in India to consider buyback as a surplus cash distribution, thereby improving overall market efficiency and corporate governance.
L&T’s decision to implement a buyback program for the first time in its corporate history asserts its strength, resilience, and commitment to its shareholders. While this strategy may present risks, such as future cash flow requirements for growth or contingencies, the management’s confidence in the company’s potential outweighs these concerns.
In the long run, this move could potentially reshape the broader landscape of capital allocation strategies in Indian companies. Only time will tell how this strategic move will play out and whether it will pave the way for similar actions by other Indian corporations.
