Quick Take | With buyback no longer an option, how will L&T rectify capital allocation?

Jitendra Kumar Gupta Moneycontrol Research

Larsen and Toubro (L&T), which for the first time took a drastic step to rectify its capital allocation, is now back in the quagmire after the SEBI denied its Rs 9,000 crore buyback. While L&T’s standalone debt-to-equity qualifies it for a buyback, the consolidated balance sheet including financial subsidiaries—typically with high leverage— have become a hurdle.

L&T had 81 subsidiaries in 2008 that swelled up to 123 by the end of FY17. This has been a major investor apprehension particularly in the light of a majority of them making losses thus dis-incentivising the capital deployed in these businesses and dragging overall return ratios.

L&T’s return on equity over the last five years stood at an average of 11.9 percent. Even after paying down some of its debt (standalone debt-to-equity at mere 0.21 times FY18) in the past, L&T continues to sit on large cash, which is not productively used other than generating treasury income. On a standalone basis, it has cash and cash equivalent of about Rs 8,500 crore.

Under the circumstances, a buyback would have been both value-accretive and tax effective to return money to its shareholders. Our calculations suggest the buyback would have reduced its equity by 16.26 percent and resulted in over 155 basis points improvement in RoE.