India’s biggest engineering and construction firm, Larsen and Toubro Ltd (L&T),
cashed in on its booming share price by raising $400 million (Rs1,852 crore) through a qualified institutional placement (QIP) and another $200 million by issuing foreign currency convertible bonds (FCCB). The firm’s share price has trebled from its lows of around Rs560 seven months ago. The last time the firm tapped equity investors was in November 2007, when it issued global depository receipts worth $400 million. Back then, too, its shares had nearly trebled in the preceding seven-month period, and the firm was able to time its share sale close to its scrip’s all-time high.
But while its ability to raise funds in this nimble-footed manner is commendable, some analysts question whether there is any need for the company to raise funds at all. L&T already sits on a comfortable cash and cash equivalents position of around Rs4,000 crore and has generated Rs1,700 crore in cash on average in the past two fiscal years. Cash generation may even be higher this year, and should be easily sufficient to take care of the capital expenditure that is estimated to be between Rs1,500 crore and Rs2,000 crore. Thursday’s fund-raising worth Rs2,800 crore will only add to the cash kitty, reducing the company’s overall return on capital employed and resulting in unnecessary dilution for existing shareholders, say the move’s critics.
The company, of course, has a different take on this. According to R. Shankar Raman, executive vice-president at L&T, “A large part of the existing cash balance is likely to be consumed by fiscal year 2011-12 as large projects such as the boiler plant, turbine plant and shipyard progress. The funds raised now will help the company position itself to take advantage of a fresh set of opportunities. Besides, for a company of L&T’s size of Rs40,000 crore, a reasonable amount of cash must be available at any given point in time.”
Graphics: Yogesh Kumar / Mint
What about the equity dilution and the impact on Return on Capital Employed (RoCE)? Raman says that the issuances result in equity dilution of only 2-3%. The twin QIP and FCCB issues will result in a dilution of less than 3%, for instance. As far as the impact on RoCE goes, the firm is of the view that it would rather work with a temporary drop in RoCE, than be strapped for cash when it’s needed.
With a liquid cash position close to Rs7,000 crore and a net debt of next to nil, “strapped for cash” isn’t a scenario L&T is likely to face for a long time. While the excess cash will depress return ratios till they are utilized, the core business is expected to deliver good returns in the near term. Order inflow has picked up considerably and concerns on pricing pressure have abated. As long as the markets do well, one could count on L&T shares riding the rally.