L&T Buyback of Shares: Arbitrage Opportunity

At its board meeting today (23/08/18), L&T (Larsen & Toubro Limited) Board approved buyback of up to 6 crore shares, aggregating to Rs. 9000 crore  via a tender route at ₹1,475 per equity share. This represents 4.29% of the paid-up equity capital. The L&T buyback price is at a premium of about 12% to its closing price of ₹1,322 on Tuesday. L&T financial position had shown a marked improvement in this year. In an important development this year the engineering and infrastructure giant launched its first infrastructure investment trust (InvIT) floated by L&T Infrastructure Development Projects, and had raised Rs 4700 crores. L&T’s performance has also been bolstered by excellent performance of its financial arm (L&T finance) and IT subsidiaries ( LTI and LTTS). L&T Buyback comes as the company celebrates its 80 years of existence. 

L&T  Buyback Updates :
  • SEBI rejects L&T’s buyback offer. Says ratio of debts owed by the Company after buyback (assuming full acceptance) would be more than twice the paid-up capital and free reserves of the Company. https://ipoandmore.com/buyback-news/
  • L&T has fixed Monday, October 15, 2018 as the Record Date for the purpose of determining the entitlement to participate in the buyback offer
L&T History of Rewarding Shareholders

L&T has been regularly rewarding shareholders with Bonus and liberal Dividends
Bonus:  2017 1:2 ( ex-bonus from July 13, 2017) , 2013 1:2; 2008 1:1;  2006 1:1
Dividend:  Rs. 16.00 ; Rs.14.00, Rs.18.2500   for last three years

L&T Buyback: A Framework to Estimate Acceptance Ratio:

This framework is based on shareholding of L&T investors who hold up to certain number of shares as on 31/03/2018. For L&T the best information available is that of number of share holders who hold less than 500 shares and their corresponding shareholding. As on 31/03/18, such shareholders(holding < 500 shares) numbered  8,43,110  and they together held 8,16,30,062 shares representing 5.83% of the total share capital.
Since in L&T case, a shareholder with about 150 shares is likely to qualify as a retail investor, we have moderated this figure based on spread of shareholders in other categories and arrived at estimated retail shareholding. To this we have added
1) Additional purchase  of L&T Shares by existing shareholders with eye on earning additional returns through buyback.
2) Purchase of L&T Shares by  new category of arbitrage investors. This is estimated to be between .5- 1 Lac investors with an average of 75 shares each.

L&T is a very old company with widespread shareholding and considerable loyalty. Thus the shares tendered by shareholders against the buyback entitlement may not be be very high and could hover around 50% or at the best 60%. There has been considerable run in L&T share after announcement of buyback and new buyers will now enter only if they see sufficient arbitrage margin.

L&T stock may go though various gyrations in the three month period due to global and political developments and thus this opportunity has considerable risks. Based on approximations indicated above and considering normal circumstances, L&T Buyback could have a acceptance ratio in 20-35% band. If there is significant reservation on part of L&T shareholders to offer shares against buyback with a long term view, the ratio can be on higher side or even up by few points.

CrossTablualtion Indicating Estimated Returns(Just Possibilities)

The absolute returns/Loss that may accrue to an Investors/Arbitrage trader are a function of Percentage Acceptance Ratio and Price Post Buyback.  Investors may kept on mind that stock markets are ruling at a high and at this  juncture and there are many political and other uncertainties related to international markets. We have  depicted  estimated Absolute Returns in a table form as a function of various possible combinations of Acceptance Ratios and Price Post Buyback.

Shares Purchased
Buyback Price1475INR
Tabulation of % Abs Returns
A) Based on Share Price at time of Post
L&T Purchase Price taken1343 Amount181305Rs.
Acceptance Ratio / Price Aft Buyback 1200125013001350
B) subsequent Market Price & Trends
L&T Share Purchase Price (later)1230 Amount166050Rs.
Acceptance Ratio / Price Aft Buyback1200125013001350

This post is purely for informative and educational purpose and is in no way suggestive of taking any position in the counter. Profit or Loss in  any buy sell operation in stocks is associated with significant risk of capital loss. For more on Buyback Benefits and other issues please refer the earlier Posts
TCS Buyback of Shares 2018
HCL Technologies Buyack 2018 (HCLTECH Buyback)
Mphasis Buyback of Shares 2018
Navneet Buyback 2018

L&T Buyback Offer Details
BuyBack intimation17-08-18
MP bef BM1239.4
MP af BM1323.05
Board Meeting23-08-18
Buy Back TypeTender Route
Buy Back Price1475
Mp bef Board meet1325
% Premium on MP11.32%
BuyBack Size -Crore9000.00
BuyBack Size ( Shares)61,016,949
Equity Capital- crore280.27
FV of Share - Rs.2
Total No. of Shares1373392138
Shares reserved for Retail 9,152,542
% Buyback4.35%
Record Date15-10-18
Buy Back Issue dateYet to Happen
Actual Retail AceeptanceYet to Happen
L&T Price Chart and Quarterly Performance:
L&T share price
Particulars/ Rs. Cr Jun-18 Mar-18 Dec-17 Sep-17 (Cr)
Gross Sales 34261 32075 30904 30541
PBIDT 10296 9646 9157 8983
PBDT 10279 9634 9151 8976
Adjusted Profit After Tax 7362 6925 6545 6460
EPS 19.17 36.07 34.12 33.67
Dividend (%) 400 0 700 700
Equity 383 191 191 191
Face Value 1 1 1 1
PBIDTM(%) 30.05 30.07 29.63 29.41
PBDTM(%) 30 30.04 29.61 29.39
PATM(%) 21.49 21.59 21.18 21.15
*Bonus 1:1 in  June 2018
Some Observations (To be Updated  with progress of Buyback):
    • L&T does not have any promoters in the strict sense and the shareholding of individual investors is quite large nearing 20% compared to figures of 2-4% for many IT companies which has recently gone for buyback.

    • Prima facie the acceptance ratio is L&T may not be as high as in the buyback of IT companies. As on 31/03/18, L&T shareholders with holding < 500 shares numbered  8,43,110  and they together held 8,16,30,062 shares representing 5.83% of the total share capital.
    • L&T is a very old company with well diversified and loyal shareholders and many may opt not to offer shares against this buyback as it is normally not easy to repurchase them later.

    • The company’s underlying  business is strong and due to above act of buyback, company may get overrated over a period of time.

  • The successful launch of first infrastructure investment trust (InvIT) floated by L&T Infrastructure Development Projects, good order backlog in  engineering and infrastructure together with outstanding performance of its its financial arm (L&T finance) and IT subsidiaries ( LTI and LTTS) could strength to the company’s performance and valuation at the exchanges. 

Standard disclaimer: I am not a SEBI registered analyst and above analysis is for educational purpose only. I may have vested interest in every stock I discuss and my views may be biased. Please do your own due diligence as stock market investments have high degree of inherent risk.

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