Shares of construction giant Larsen & Toubro plunged by 12 per cent on Monday morning and closed more than eight per cent down as a cloud hung over the company’s losses in hedging through financial transactions not directly connected with its main business.
While the rest of the stock market recovered from a big fall, L&T was specially affected by reports of the losses, which the company management confirmed but added that it will not hit profits.
Hedging involves complex buy or sell positions in volatile commodity or stock markets to cushion risks or keep costs under control. L&T had started hedging in metals over the last few months. With an order book of $6 billion (Rs 24,000 crore) and an exposure to metal prices at 40 per cent of around $2.4 billion (Rs 10,000 crore approx) the company is vulnerable to price fluctuations. Larsen & Toubro International FZE, a Sharjah-based subsidiary of L&T is used for the hedging operations.
Director and chief financial officer of L&T, YM Deosthalee told Hindustan Times that losses would be limited to Rs. 200 crore or less – accounting for less than 10 per cent of the current year’s estimated profit. “Metal prices have remained subdued in January. As a result the parent company has gained a lot. However, the subsidiary which had started hedging had stop-loss instructions in place and recorded the losses when the prices remained low.”
The scrip has slid by more than Rs 2,000 from its 52-week high of Rs 4670 last November. Overall market sentiment added to the news of an anticipated loss from hedging and the stock closed the day at Rs 2728,down 8.68 per cent.
Brokerage houses revised the earnings estimates for the company and also their price targets after their meeting with the management. Citigroup Global Markets set a target price of Rs 4,561, an upside of 52.6 per cent from Friday’s market price of Rs 2,988.