L&T may consider more share buybacks

11 months ago 17

Synopsis

"We have surpluses beyond our requirements, not for all times to come, but at least for some time to come. Given that, we thought that it is a good way to create value back to shareholders. One way to create value for shareholders is to keep distributing dividends. So we decided not to interrupt with that but to go for a buyback."

 R Shankar Raman, CFO, L&TR Shankar Raman

Driven by robust first quarter earnings and the first-ever buyback proposal of Rs 10,000 crore, engineering behemoth Larsen & Toubro’s stock touched all-time high of ?2,673.60 on the BSE, Wednesday. L&T's Chief Financial Officer, R Shankar Raman tells Kalpana Pathak that the company plans to consider a buyback once every few years. Edited excerpts:

Your share price is doing well. Why did you decide on a buyback?
We have surpluses beyond our requirements, not for all times to come, but at least for some time to come. Given that, we thought that it is a good way to create value back to shareholders. One way to create value for shareholders is to keep distributing dividends. So we decided not to interrupt with that but to go for a buyback. Around 10-15 years ago the company believed in creating value to shareholders by investing in hard assets. Now, through economic cycles, we have come to the conclusion that we should be capital light and return accretive. So, this switch in strategy made sure that we are exiting capital heavy businesses and unlocking the capital. So every now and then, we could have a pool of surpluses and if all goes well, we can look at it as a part of a routine shareholder value program. Once in a few years to consider a buyback and steadily work on the dividend curve.

How do you see the commodity prices, sticky inflation and rising interest rates a concern for your business going forward?
I think interest rates have peaked. I'm looking to the rest of the year as stable, if at all, towards the end of the year, maybe some drop in interest rates. So, a lot depends on obviously the monetary policy. But it looks like a 7% GDP growth with a 4-6% inflation band. So I'm reasonably confident that we will have stable rates if at all, maybe a correction down towards the end of the year. As far as inflation is concerned, I think there are two types. One is commodity, which goes through opportunistic cycles of demand, supply mismatches and the prices tend to spike. But those are normal, get corrected and can be modelled. What we could not model was the effect of the pandemic and the (Russia-Ukraine) war. We couldn’t model how much of supply disruption will happen, how much of price correction will happen. All of this led to some unnatural price levels which have since corrected. But the ones which are at the commodity end of inputs are still running high and have not come back to pre-pandemic levels. So we were not getting the benefit of softer prices. But this time over, we're trying to be a little more careful in assessing the input prices and so long as the price trajectory remains around these levels even if they are higher than the pre Covid, we still can possibly manage decent returns.

So what are the challenges for L&T going forward?
Execution bandwidth. I think it's good to have such large order inflows and an order book. We have to, at the end of the day, execute. Money is made or lost in execution. According to me, the biggest challenge that the company will be having for some time to come is we have to get more and more people skilled to do the kind of work that we are doing. Unfortunately, the young population is moving in different directions. The well-heeled, well-educated move into various areas including in-- strategy, consulting, risk advisory, ESG advisory, investment banking etc despite their background in engineering (discipline). So our ability to get more and more of lesser graduates to do more skilful jobs. This would mean automation to a high level, to use robotics. And in-time use the memory of past jobs into the current jobs execution. So you need to create a depository of a knowledge bank, if you will. Where people can dip in. Where SOP's would get generated. In some form, in a very far-fetched way, you can say this is the AI of the project sector where the learnings that are captured come out as SOP. So the next time you don't have to discover from zero, you have something to start working on and hopefully not make fresh mistakes.

More and more companies are looking at addressing their GHG emissions. Do you see a change in your order mix due to this?
Actually the transition is beginning to show in our order composition. Of our order book which is close to $50 billion today, 10% or almost $5.5 billion worth of orders are in solar and green energy. Also, close to 32% of our orders that we took in the first quarter came from the private sector and of this about half came from energy transition orders. It could be either setting up a green energy plant or placing orders to reduce the emission levels. We find in our heavy engineering business the orders to upgrade existing equipment are increasing. So revamp and upgrades have become a fairly attractive business line.

Any update on electrolyser manufacturing and green hydrogen plans?
Electrolyser technology sign up has been done. So, we are now constructing the first electrolyser plant. 1GW is our first phase plan, of which the first segment would be about 500megawatts. We hope to complete the plant and be ready for commercial production by the end of the year so that next year we'll begin to roll out the electrolysers and sell them to markets which could be anywhere in the world. It all depends on how good the product that comes out and how price competitive it is. As far as EPC projects for greenhydrogen, we are still waiting for the big players to actually order out. Large groups have announced plans for green hydrogen, including the public sector. I suppose at some time during the course of the year, at least one or two bids will come out and then we will get an opportunity to quote for the mess EPC contractor.

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