Can a special dividend by L&T trigger upside in the stock?

ET Intelligence group: L&T’s proposed special dividend may rekindle investors’ interest in the stock. It has been range bound for the past six months due to the concerns over growth in order intake and revenue for its core engineering and construction (E&C) business amid the COVID-19 pandemic.The board of the country’s largest infrastructure company will be meeting on October 28 and if the special dividend is approved then the record date will be November 6.In early September, L&T received Rs 14,000 crore from the sale of its electrical and automation division to Schneider Electric. A portion of the net proceeds of around Rs 11,500-Rs 12,000 crore after deducting the capital gains tax, will be utilised towards paying the dividend.According to brokerage Nomura’s estimates, the dividend amount may be around Rs 5,000 crore or Rs 35 per share thereby improving the return on equity (RoE) by 15-20 basis points. The brokerage’s assumption considers the need of incremental working capital requirement and a reserve for the expected loss from Hyderabad Metro project, L&T’s wholly owned subsidiary, till FY22.The announcement of a special dividend allays investors’ concerns that the sales proceeds would be used to infuse capital in the loss making metro project. Any incremental investment in the business with low return will weigh on the RoE, particularly when earning prospect from the core E&C business is subdued.The Hyderabad Metro project has a debt of Rs 15,000 crore. It requires a cash infusion of around Rs 8,000 crore to become cash flow sustainable from the next year. The country’s first privately owned metro project posted losses of Rs 148 crore and Rs 382 crore in FY19 and FY 20, respectively, according to L&T’s annual report. Analysts believe that the metro is unlikely to break even in the next three-four years. As a result, any further capital infusion would be RoE dilutive for L&T in the medium term thereby adversely affecting the stock’s valuation multiples.A special dividend implies that L&T’s board is not looking at an immediate cash infusion in the metro project. A prudent capital allocation will be a key trigger for the stock since in the past 17 years, L&T’s non-core investments have delivered a lower return on capital employed (RoCE).The stock has underperformed the benchmark S&P BSE Sensex by 22% from March 23 lows. The foreign portfolio investors pared their holding in the stock to 17.9% in the September 2020 quarter from 18.8% in the previous quarter. The eroding core business valuation can be gauged from the fact that the stock’s gain of 30% from the March bottom is mainly due to the rising value of its listed non-core subsidiaries.The company’s core business has been showing gradual improvement in order flow. It recently bagged Rs 25,000 crore Mumbai-Ahmedabad bullet train project. This together with the special dividend may support the stock in the medium term. On Monday, the stock was up by over a percent amid weakness in the broader market.
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