By selling its 11.49% stake in UltraTech Cement Ltd, Larsen and Toubro Ltd (L&T) has raised Rs1,037 crore.
The company was able to sell its shares at a discount of 5% to the prevailing share price of the cement company and at a 10% discount to its 52-week high, indicating that it was a well-timed move.
Analysts had been valuing the UltraTech holding at a discount of 25% in their sum-of-parts valuation for L&T, so the sale at a mere 5% discount is a positive.
Of course, the company could have raised another Rs500 crore if the sale was done in late 2007 or early 2008, but having missed that chance, it seems to be cashing in at the next best opportunity.
It must be noted, however, that, the proceeds from the sale amount to just 1.1% of the company’s market capitalization and so would have a limited impact on its valuations. It’ll help the company retire its debt to some extent; since last fiscal, borrowings had ballooned to Rs6,550 crore from Rs3,600 crore. But again, the impact on earnings will not be that significant since interest costs account for only about 1% of sales.
L&T shares, at current levels of Rs1,629, have nearly trebled from their lows in early March this year, and valuations are now looking rather stretched.
In a recent report, Citigroup Inc. had estimated the valuation of the company’s subsidiaries at Rs157 on a per-share basis. Adjusted for this, the parent company is now valued at Rs1,472 per share, or as high as 28.5 times one-year forward earnings. Considering that the brokerage expects earnings to grow at about 20% in the coming three years, valuations are clearly expensive.
A report by Nomura Research dated 29 May, when the shares quoted at Rs1,255, says, “In our view, the market is already factoring in very strong growth in order inflows even off a large base, and is assuming that profitability will be maintained. As there are risks to inflow expectations and a slowdown in execution rate, we believe valuations are expensive and maintain our reduce rating.”
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