The Hindu Business Line : L&T: SEBI decision will take long time

EXISTING shareholders of Larsen & Toubro can stay invested till the cloud of uncertainty over the open offer by Grasim Industries clears up. The Securities and Exchange Board of India (SEBI) has put on hold Grasim's open offer at Rs 190 per share. SEBI's directive is due to the review of its decision in the Gujarat Ambuja-ACC case, which may have a direct impact on the Grasim-L&T case. What does this mean for L&T shareholders:

SEBI is now essentially looking at whether an open offer is due by Gujarat Ambuja for ACC shareholders under the `change in control' clause of the SEBI takeover code. If it decides that one is due, Grasim may also be asked to make the open offer for L&T at the price of Rs 306 it paid to Reliance together with interest at 15 per cent per annum. This would make a `hold' approach appropriate for L&T shareholders now. But the waiting period may be long - a year or so, if not more - as any SEBI order to this effect may be contested in higher courts. Still the returns would be attractive. Investors with a high-risk preference can contemplate small exposures to capitalise on such an outcome.

Shareholders could contemplate booking profits - especially those who hold a large number of shares - if and when the L&T stock reaches the Rs 250-Rs 270 range. Since the open offer (if ordered at Rs 306 per share) acceptance would be on a proportionate basis, not all shares tendered would be accepted. And once such an open offer is out of the way, one can expect the L&T stock price to retreat well below the Rs 306 levels and may be even below the Rs 190 level proposed by Grasim. So investors may be saddled with some shares that have to be sold at substantially lower prices. This is why cutting exposures in the Rs 250-Rs 270 range may be an approach that would deliver better returns. This may also help guard against the possibility of SEBI deciding otherwise.

Even if SEBI decides that an open offer is not triggered by the `change in control' clause, Grasim's open offer at Rs 190 per share (which may be revised to some extent following the widespread view that the price is too low) offers protection on the downside. At around the Rs 190 levels, the L&T stock also has reasonable support from underlying fundamentals.

Till this whole drama plays itself out, there is likely to be some divergence between the fundamentals of L&T and the valuation of its stock with the former taking the backseat to developments of a one-time nature. The L&T share now trades at a price earnings multiple of 15 times its 2001-02 earnings and 29 times its annualised 2002-03 earnings.

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