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L&T, Dubal venture: There it goes! - Views on News from Equitymaster
 
 
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  • Apr 5, 2005

    L&T, Dubal venture: There it goes!

    As per a latest announcement, engineering major, L&T, has entered into a joint venture (JV) with Dubai Aluminium Company Limited (Dubal) for setting up integrated bauxite mining cum alumina refinery project in Orissa. The project involves setting up a 1.4 million tonnes per annum (MTPA) alumina refinery, bauxite mine and related infrastructure (including a captive power plant, port facility, township and other utilities). The total project cost is estimated at around Rs 50 bn and L&T will hold a 26% stake, with the remaining 74% being held by Dubal.

    While the contract comes in good for L&T's engineering and construction (E&C) division in terms that it will boost the order book that already stands at Rs 164 bn, what one fails to understand is the decision by the company to hold a 26% stake in the venture. L&T had, in the past, burnt its fingers by diversifying into the cement business, which it later demerged and sold to Grasim. Ventures into areas like financial services have also been futile. This new 'diversification' of entering the 'aluminium-related' business, thus, does cast aspersions on the company's strategy for growth. Besides, while the money may be committed up front, given the fact that the plant may be commissioned in 2009, the returns from the same are likely to be long-term in nature. More importantly, one is not sure whether the robustness in aluminium prices will sustain by 2009 and therefore, this exposes the company to commodity cycles.

    We believe that the core strengths of L&T rest in infrastructure-related activities. At the current price of 1,028, the stock is trading at a price to earnings multiple of 15.4 times annualised 9mFY05 earnings. Post the demerger of its cement business to Grasim, it was felt that the focus of L&T has centered on the infrastructure sector. However, if media reports are true, then we believe that the management has failed to learn from its past mistakes (read diversifications).

     

     

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