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Larsen & Toubro is presently in the midst of its first-ever buyback, and it’s a massive 10,000 Cr. However, this is actually its second try. In August 2018, SEBI turned down the initial buyback plan as the company debt was too high. Now, 5 years later, L&T is trying again and it seems like they might succeed this time.
In a nutshell:
- L&T shareholders as of Sep 12th, 2023 (record date) are eligible for the buyback
- The share buyback is open from 18th to 25th September 2023
- The buyback is ~10% above the CMP
- The acceptance ratio is expected to be around 25-30%
- If you hold the shares, consider tendering all of them
- No actionable from our side for our L&T holding in our Low Vol Portfolio
Why the buyback?
In 2021, L&T came up with a 5-year plan called “Lakshya 2026” to transform the company and boost its growth. As part of this strategic plan, the company set a target for itself to achieve an ROE of 18%+ by 2026. The current ROE is 12.8%. To meet this ambitious goal and to reward its shareholders, the company is undertaking the buyback.
*Source: FY2021-22 Annual Report
L&T Buyback Offer Details
On July 25th, 2023, L&T announced a tender buyback for up to 3.3 Cr fully paid-up equity shares with a face value of ₹2 each, priced at ₹3200 per share. This represents 2.2% of the total paid-up capital. The total buyback amount is ₹10,000 Cr. The record date was set for September 12th, and the tender offer opened on September 18th and will continue until September 25th.
A buyback is a lucrative and tax-efficient method to reward shareholders. (Read: Why are buybacks a better way for companies to distribute returns than dividends?)
Retail shareholders (those who own shares worth less than ₹200,000) are allotted a 15% reservation of the entire buyback. This means that out of the 3.33 Cr total shares, around 50 Lac shares are set aside for retail shareholders. Based on the closing price on Sep 12th (the record date) of 2948.5/-, anyone holding 67 shares or less is classified as a retail shareholder and qualifies for the 15% reserved category.
The shareholding distribution of the company as of March 2023 is shown below. At that time, a total of 13.3 Lac shareholders held fewer than 500 shares each.
Let’s make a few assumptions: Out of all the shareholders holding fewer than 500 shares each (the superset), we estimate that around 40% of them will have fewer than 67 shares (the subset). This means approximately 5.3 Lac shareholders will have fewer than 67 shares each, totaling about 3.5 Cr shares.
With a reservation of 50 Lac shares for the buyback, we anticipate the acceptance rate for the retail shareholder to be roughly 14% (assuming every shareholder tenders their shares and each one holds the maximum allowable number of shares).
However, the actual ratio might be higher. Many shareholders may not participate either due to a lack of awareness, inability or simply overlooking the opportunity. Considering these factors, we can expect a tender acceptance rate of about 25-30%. In practical terms: if you own 67 shares and decide to tender all of them, the company is likely to accept around 16 of those shares.
Holding L&T shares? Consider tendering all of them
- If you hold L&T shares as part of your long-term portfolio and are eligible for the buyback, you might consider tendering all of them.
- As previously mentioned, the acceptance ratio could be around 25% to 30%.
- Given that there’s no capital gains tax on buybacks, after the acceptance, you can repurchase the same number of shares after the buyback to maintain your shareholding level.
- Expect the entire process to take around 3-4 weeks.
- A significant risk to be aware of is that the share price might rise above 3200/- per share post-buyback. This means you might need to buy the tendered shares from the open market at a price higher than the buyback rate.
Frequently Asked Questions
How do I tender the shares online?
Most brokers offer an option to tender shares online. Please check with your specific broker. For instance, here is the process for Zerodha.
Can I tender the shares offline?
Yes, you can. Here is the procedure to tender your shares offline.
Will my shares be blocked during the tender period?
Yes, if you decide to tender, your shares will be blocked until the company either accepts or rejects them, which could be around 1-2 weeks after September 25th.
What if I have shares with multiple brokers? Do I need to tender through each broker separately?
Yes. For example, if you have 25 shares with Zerodha and another 25 with Upstox, you’ll need to log into each broker’s platform and tender 25 shares from each.
Since this stock is part of our Low Vol portfolio, will tendering affect the portfolio’s weightage?
Because buybacks aren’t taxed, you can repurchase the tendered shares at the market rate to restore your position in the Low Vol portfolio.
Is tendering the shares an actionable for the Low Vol portfolio?
No. It is not an actionable from our end. We will not consider the tendering of shares in our model portfolio or in our NAV calculation.
However, if you personally choose to tender your shares, you can then buy back the accepted shares from the open market. Please consider the risk of having to repurchase at a price higher than ₹3200/- per share.
Please ping us on our slack channel #corp-actions-and-ipo for any queries.
NOTE: As a disclosure, we own the stock in our Capitalmind portfolios. This article is purely for informational purposes only and not a recommendation.
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