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Restructuring holds the key... - Views on News from Equitymaster
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  • Mar 11, 2000

    Restructuring holds the key...

    At face value,Larsen & Toubro (L&T) would qualify for a typical Indian conglomerate that ventured into an array of businesses to generate growth and deploy surplus cash during the 'license raj'. However, this company is much more than just that. Take a closer look and one finds that L&T has embodied one trait that everyone is only now seeking - a professional management. And it is this trait that is evident across the length and breadth of the company's operations.

    L&T is one of India's leading conglomerates with interests in engineering, procurement and construction (EPC) (61 percent of sales in FY99), cement (22 percent), electrical and electronics (9 percent) and others (including software). Well, the introduction does not stop there. It is the country's largest in EPC company and, till recently, the largest cement producer. L&T has directed its attention towards the telecom sector, including Internet and network services. The company also has an extensive presence in software services through a 100 percent subsidiary that employs over 1,200 software professionals (FY99 revenue Rs 1.6 bn).

    (Rs m) 3QFY2000 3QFY1999 Change
    Net Sales 17,185.5 17,892.6 -4.0%
    Other Income 260.2 195.3 33.2%
    Expenditure 15,623.9 16,403.4 -4.8%
    Interest 918.1 358.5 156.1%
    Depreciation 688.7 626.4 9.9%
    Profit before Tax 215.0 699.6 -69.3%
    Tax 21.6 64.0 -66.3%
    Profit after Tax 193.4 635.6 -69.6%
    Net profit margin 1.1% 3.6%  

    This may rightly seem as a wide array of businesses, related and unrelated. Add to this the company's venture into tractors (in collaboration with John Deere) and it appears like a cocktail of businesses. There is not much of disagreement on this front. Appropriately, the stock markets punished the company for its lack of focus. The company's market capitalisation declined by over 50% between June 1996 and December 1998.

    L&T's main line of businesses (EPC and cement) hold great promise. Take its EPC division. The division boasts world class fabrication facilities and is credited with having executed challenging projects both in domestic and international markets. Its construction arm, which is five times the size of its nearest competitor, is also the most technologically competent in the country. Coupled with these advantages, the division also boasts alliances with global leaders like Chiyoda (Japan) to execute projects in specialised areas where it lacks experience. These factors have aptly placed L&T in its bid to capture a large chunk of business in coming years. Indeed, infrastructure spending over the next 20 years is expected to top Rs 7.6 trillion.

    The company's cement division, which has a capacity of 12 million tonnes, is being expanded to add another 6 million tonnes. The move is aimed at enabling the company to capture a larger market share in coming years when infrastructure spending picks up. The company's plants, which are built by its own EPC division, are considered to be very efficient as compared to other domestic companies.

    To counter criticism of its diversified nature, L&T has initiated a restructuring exercise, which it must be mentioned, has been welcomed by investors. The highlights of the proposal are -

    • Hiving off the cement division
    • Focus on the telecom sector (L&T Telecom, a subsidiary), including Internet and network services, and
    • Core business focus on EPC and electronics

    The restructuring package seems to have brought some semblance in the company's operations. It has converted L&T from a diversified and cash deficit company into one that is focussed on EPC and engineering - and most importantly, a cash surplus company. In recent years the company's cement division had been a cash guzzler as investment in fresh capacities increased and the division continued to post losses on the back of a slack in domestic demand. Importantly, the new exercise has formalised the company's entry into the high growth areas of telecom, Internet and network services.

    L&T it seems is finally setting its house in order. Its core business of EPC and engineering are expected to perform well given their technical edge and experience. Not to forget the anticipated rise in infrastructure spends. With the cement division hived off to a subsidiary (and the possible entry of a multinational corporation as partner) L&T will no longer need to bear the burden of large investments even though returns are low (industry sources claim that currently the division is making a loss). Finally is the new focus on 'new economy' sectors of telecom, Internet and software. These businesses could turn into key drivers of growth in coming years. L&T, it must be stated, is well placed to capitalise on the growth in domestic demand in coming years.



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