Larsen & Toubro Limited (L&T) has exercised a call options on its high interest Value Bonds issued in 1996. The bonds were bearing an interest rate coupon of 16.75% - 17.5%.
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 company's decision to exercise the call option comes shortly after the declaration of its 3QFY00 results. During the quarter, the company's net profit declined by over 69%. This was largely the result of a 150% jump in interest expenditure at Rs 918 m.
L&T had earlier resorted to large borrowings to fund its capex requirements that were aimed at building additional cement capacity. However, since then the cement market took a downturn, thus hurting realisations. Moreover, the decline in interest rates left the company with high interest debt that further aggravated the situation.
The cement sector seems to be looking up although the price recovery is still skewed. The company is however bogged down by the high interest debt – approximately 400 basis points over the existing prime lending rate.
The decision to exercise the call on the bonds will augur well for the company. It will help lower the interest burden on the bottomline. It will also lower the company's costs of operations that will in turn make it more cost competitive vis a vis its competitors.
Most analysts have rated the stock as a 'BUY' on account of the restructuring exercise undertaken by the company. L&T is to hive off its cement unit into a subsidiary while focussing on its core areas of operations. The other key businesses for the company will include EPC and infotech.
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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