Jun 17, 2003|
L&T: Making up its mind
The L&T management seems to have finally made up its mind regarding the demerger of its cement business. Newspaper reports indicate that Grasim may offer a higher valuation for L&Tís cement division. This means that Grasim is likely to hike its offer price for the cement business once the demerger is carried out. However, one thing is clear. L&Tís future has been the subject of intense speculation in the last few months due to the uncertainty regarding its cement division fate. This could ease going forward.
According to recent reports, Grasim is likely to offer between Rs 160 per share and Rs 170 per share for the demerged cement division. For the EPC division however, the valuation offered by Grasim stands between Rs 120 per share and Rs 130 per share. Grasim seems to have lowered its earlier position where it was ready to offer Rs 130 per share for the cement division, while it valued the EPC division at Rs 163 per share. What is also noteworthy is the fact that Grasim seems to be insisting on a valuation of between Rs 290 per share and Rs 300 per share for L&T as a whole. Despite the revision in offer price, the cumulative value remains the same i.e. Rs 290 per share.
In our earlier article, we had tried to assess valuations for both EPC and cement divisions of L&T. However, since we believe that the valuations we gave to the EPC division at that point of time were a little optimistic, a more correct valuation for the business may be found out by assuming a market capitalization to sales ratio of 0.4x. According to this assumption, the valuation of the EPC division works out to be close to Rs 113 per share, which is very near to Grasimís valuation. The valuation of the cement division seems to be in line with our initial optimistic estimates at US$ 70 per tonne. Based on this, per share value of cement business stood at Rs 106 per share. But this is likely because we have assumed higher debt component in our estimates.
Overall, the pricing seems to be fair for the cement and EPC divisions. For existing shareholders of L&T this is good news. However, if you are looking to invest in the stock, please be cautious, as the issue has not been fully decided upon.
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