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Motilal Oswal
L&T (Buy)
CMP: ₹1,287
Target: ₹1,800
To start with, there is no major tax arbitrage on share buyback versus the dividend payout option now. The latest union Budget proposed 20 per cent tax on buyback of shares, thus doing away with the tax arbitrage between dividend payout and buyback of shares. Therefore, it does not make any difference to L&T whether it chooses the share buyback or the dividend payout route to return excess cash to its shareholders. Interestingly, L&T’s earlier decision was based on tax arbitrage (to opt for buyback) as it was considered to be a better way to reward shareholders.
Any announcement on higher dividend payout/dividend may lead to re-rating: In light of the changes in the Budget and SEBI’s amendments, the buyback option doesn’t seem as lucrative as envisaged earlier. However, given L&T’s focus to be a pure-play EPC company and aversion to asset business, we expect the company to either opt for higher dividend or buyback to return excess cash to shareholders. This is also important considering that the company expects to garner gross proceeds of ₹14,000 crore from the sale of its E&A business. Any announcement to increase payout by dividends or buyback may be a re-rating catalyst for the stock.
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