Collateral Damage - Larsen & Toubro

When the dust will settle down on Satyam Computer episode, we may find many more collateral damages, but as of now one company which is definitely licking its wounds is Larsen and Toubro. L&T, through its subsidiary L&T Capital, accumulated little more than four per cent shares of Satyam Computer prior to confession of fraud by his founder CEO and after Mayatas uproar.

On January 23, 2009, in an unprecedented move, L&T increased its stake in Satyam from four per cent to 12 per cent. The move is primarily aimed to either average the cost of its acquisition or increase its stake to 15 per cent. But what was considered as a good investment move has become albatross around its neck. Though with latest round of acquisition L&T was able lower down its average cost of acquisition from Rs 157 to Rs 80 per share, its losses on investment of around Rs 640 crore made to acquire 12 per cent stake of Satyam Computer (we tried to know the exact amount of investment and percentage of holding but L&T spokesperson refused to comment) is still very high at Rs 270 crore at prevailing price of Satyam Computer (Rs 46 per share). Therefore, at the end of the year the company has to take hit of this amount in its consolidated profit and loss account.

In a second option if the company decides to increase its share to 15 per cent, it will have to bear more losses. Once the L&T's stake at Satyam Computer reaches 15 per cent, L&T has to make open offer of next 20 per cent at a price of "average of last six months" which works out to be Rs 274 and at current market price of Satyam's share at Rs 46 it will entail loss of  around Rs 3100 crore. Whatever may be the reasons of L&T buying shares of Satyam Computer Services, the market has given its verdict. Share price of L&T has taken huge beating and is currently trading at Rs 638.2 down by almost 26 per cent from January 7, 2009 when the disgraced CEO of Satyam Computers accepted the fraud in the books of its accounts. Company's market capatalisation has been eroded by Rs 12900 crore since then. To put this number in the right perspective, total market cap of Satyam computer as of now is Rs 3116 crore.

We are of the opinion that L&T may approach SEBI to exempt it from acquiring 20 per cent shares from market as open offer at six month average price. This seems plausible with the nature of events that are unfolding after confession of embezzlement of fund by Satyam CEO and appointment of Board of Directors by the government, which is unparalleled. This will help the company not to show mark to market losses in its book. Moreover if L&T books its losses of mark to market on investments in Satyam, it will only depress L&T's earning by Rs 4.5 per share which is 5 per cent of trailing twelve month earning. But the fall in market cap is by more than 25 per cent, which shows that the market has overreacted. Moreover L&T infrastructure business remains intact and is trying to get a foothold in the information technology business through its subsidiary L&T Infotech. It contributed five per cent to the consolidated topline of L&T and ten per cent in their PAT. This acquisition will provide L&T Infotech launch pad to get into league of tier 1 information technology company of India. Hence we ask our readers to remain invested in the company and as more clarity emerges prices will adjust accordingly.