India’s biggest engineering and construction firm, Larsen and Toubro Ltd (L&T),

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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.

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.

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