The company has become a business that doesn't require too much cash to execute its core infrastructure projects. However, though it makes sense for the company, shareholders who stick it out (and don't surrender) might have more to gain
L&T's market cap hit an all-time high of Rs 3,73,000 crore. Image: Sankhadeep Banerjee/NurPhoto via Getty Images
On 20 July shareholders of Larsen & Toubro (L&T) were in for a pleasant surprise. Four years after an abortive attempt at buying back its shares the company announced plans for another round. The market cheered and the company’s market cap hit an all-time high of Rs 3,73,000 crore.
The company plans to return Rs 10,000 crore to shareholders through the buyback of 3,33,33,333 shares at a price of Rs 3,000 or the final price agreed to by the board. The move will extinguish 2.3 percent of the share capital of the company. This is the first time the company has announced a buyback after its Rs 9,000 crore buyback attempt in 2019 failed on account of not being approved by SEBI as the company’s debt would be more than twice the net worth.
On the face of it the decision to buy back is a curious one. After all the company had been amply rewarding shareholders with rising sales and profitability, falling debt and a higher return on equity. And investors have taken notice. After spending a decade with a 4 percent annual return from its high hit in November 2007 the stock has been on a tear. The stock has since then returned 14 percent a year to shareholders between 2017 and 2023.
At the same time its financial metrics have improved. Inventory days are down to 41 days in March 2023 from 60 days in March 2012. Days payable (the number of days it takes to pay creditors) have climbed to 302 days from 244 days. This paints the profile of a company that is able to get suppliers to wait for payments and reduce capital blocked in inventory.
The buyback also comes at a time when infrastructure spends have been rising. In the Union Budget presented in February 2023 the government for the first time laid out a Rs 10,00,000 crore infrastructure spending target. L&T, with a portfolio that straddles civil engineering, hydrocarbons, urban transport systems, power plants and defence, is well positioned to benefit. Sales are up 9 percent a year in the last five years to Rs 1,83,341 crore in the year ended March 2023. Why then return cash to shareholders instead of deploying it?