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L&T to expand capacity to 20 million tonnes - Views on News from Equitymaster
 
 
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  • Jan 7, 2000

    L&T to expand capacity to 20 million tonnes

    Larsen & Toubro Limited (L&T) is considering a move to expand its cement capacity to 20 million tonnes by 2002. The plan is to be executed in two stages and will cost the company Rs 10 bn. The company has stated that it is still deciding on whether to hive off its cement division before or after its expansion plans is executed.

    L & T is the largest engineering, procurement and construction (EPC) company (58% of total revenues) in India. The company also has major business interests in cement (24% of total revenues, capacity 12 mtpa), and software.

    L&T's move is probably motivated by the fact that cement demand is likely to outstrip supply growth in the coming two years. This would improve the prospects of the cement sector. Moreover, the company would be attempting to try to regain its numero uno status in the domestic market (ACC Gujarat Ambuja are the leaders) and also preparing itself for competition from international majors like Lafarge and Holderbank.

    L&T's earlier announcement that it was hiving off its cement division was greeted by all. This was mainly due to the fact that this move would have unlocked shareholder value. Over the past few years, L&T's aggressive cement capacity expansion plans brought overall corporate profitability under pressure even as its EPC division continued to record excellent performance. A hive off would unlock the value of the EPC division while at the same time converting L&T from a commodity driven (dependent on market price of cement) company to a purely engineering and construction company. This would have augured well for the organisation.

    The current expansion plans, if executed before the hive off, would put further pressure on the cash flows of the company. This is mainly because the improvement in cement price realisations has been regional rather than national. Moreover, the company's profitability would continue to depend on the price realisations of cement.

    A hive off on the other hand would leave L&T to concentrate on its EPC division that is a leader in the domestic market. It could then gear itself to tap the construction boom that is widely expected to take place in the Indian economy. Also, L&T's leverage ratios would reduce, and so would the debt service burden. The company would thus benefit from an improvement in margins. Moreso because its revenues would be driven largely by factors such as the quality of work rather than prevailing market prices (as in the case of cement).

     

     

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