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

The buyback is part of L&T's plan to improve its Return on Equity (RoE) as part of the group's 'Lakshya 2026' plan, Raman added.

According to an analyst from a foreign brokerage firm, the buyback is expected to boost L&T's Earnings per share (EPS) and Return on Equity (RoE). The analyst foresees a potential enhancement of RoE by 40-60 basis points (bps), while EPS could see a slight upward revision of merely 4-5 percent.

When a company buys back its own stock, it reduces the number of outstanding shares. As a result, the company's earnings are divided among fewer shares, which automatically increases its EPS. The return on equity would also improve because there is less outstanding equity.

“This (buyback) will likely help the company achieve its strategic target of 18 percent RoE by FY25-26,” said ICICI Securities.

Even Nuvama Institutional Equities believes the buyback is a positive surprise.

The conglomerate’s decision indicates its confidence in the future growth, and the perception that its stock is undervalued, pointed out Sonam Srivastava, Founder and Fund Manager at Wright Research.

“This may buoy the stock price in the short-term, but in the long-term its performance will be dictated by its capital allocation policy. If the company is able to deploy capital to drive higher growth and better quality of earnings, the stock will see good compounded growth,” she said.

As on June 30, 2023, L&T's cash-on-books stood at around Rs 40,000-45,000 crore on a consolidated basis.

Brokerage commentary

The buyback has largely been factored in the stock price. What would now carry the stock higher or make it ripe for re-rating is the divestment of non-core assets such as the Hyderabad Metro or Nabha Power.

Kotak Institutional Equities is of the view that L&T’s stock is expensive given its 28 times and 23 times its one- and two-year forward earnings.

However, Prabhudas Lilladher is optimistic about the engineering major's prospects. It believes L&T is well-placed to benefit in the long term due to several factors, including strong tender opportunities, improved domestic order conversion, a notable increase in hydrocarbon and renewable energy orders from international markets like Saudi Arabia, and an anticipated rise in private investment in the domestic market.

The EPC major registered an order inflow of Rs 65,500 crore, up 57 percent year-on-year (YoY) in Q1 FY24, taking the order book as of June-end 2023 to an all-time high of Rs 4.1 trillion, which is around 2.3 times its FY22-23 revenue. The domestic market accounts for 71 percent of this, the rest being international business.

Management commentary

The management has maintained sales growth guidance of 12-15 percent and an order inflow growth target of 10-12 percent.

Raman had said during the conference call that L&T is likely to meet the higher end of its revenue and order inflow guidance for 2023-24, and may consider revising its guidance for both revenue and operating margin after the October-December 2023 quarter.

He said that L&T's order inflow is likely to taper towards the second half of 2023-24 due to the upcoming general election in India between April and May 2024.

"We will have to be wary of a slowdown in order inflow due to the upcoming general election and plans of the subsequent government that may take over," Raman said.