According to newspaper reports, Larsen and Toubro Limited's (L&T) restructuring plan has not met with the approval of the financial institutions (FIs). The FIs are worried on account of the debt servicing ability of the company after the hive off. The FIs have a debt exposure of Rs 26 bn to the company.
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.
The FIs' decision not to support the restructuring move will come as a surprise to all parties. This is mainly due to the fact that the hive off has met with widespread approval. Infact the stock markets too have given their support to the restructuring exercise by driving up the price of the company's stock.
The company commands a dominant position in the cement industry. However, due to its cyclical nature L&T's overall profitability has often been bogged down by the performance of this one division. Its EPC division commands a premium position in the industry. The division has continued to perform well over the years, despite the slowdown in the industry. However, the poor performance of the cement division stymied overall corporate profitability. In view of this, a move aimed at separating the two businesses makes sense, as it will help unlock value of the EPC division.
The company has stated that it will go ahead with the approval process for the restructuring despite the concerns voiced by the FIs. The FIs are of the view that the cash flows generated by the EPC division will no longer be available to service debt. However, they seem to be ignoring that the joint venture partner may be financially sound and capable of meeting any shortfall. Moreover, the improved prospects for the cement sector should make the joint venture company capable of servicing the debt.
Larsen & Toubro (L&T) has announced third quarter results of financial year 2016-2017 (3QFY17). The company has reported 1.7% YoY growth in sales while profits have grown 38.9% YoY. Here is our analysis of the results.
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