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L&T: Shaping up for the new millennium

Jun 23, 1999

Larsen and Toubro (L & T) (FY99 Sales Rs 72.9 bn) is to split into three companies - engineering and construction, cement and information technology. The aim of this restructuring exercise is to increase shareholder value. The company will be appointing a consulting firm to advise it on ways to increase shareholder value. 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.

Over the past few of years the cement division has been a drain on the company's cash resources - the cement division accounted for over 80% of the company's total capital expenditure (capex). The capex was mainly related to the setting up of fresh capacities. While in the initial years capex on cement impacted the company, in the later years it was the low cement prices, which adversely impacted the company. In contrast to this, the EPC division has consistently posted profits.

The cement division has overshadowed the excellent performances of the other divisions of the company. This has led to the company receiving a lower valuation in the markets vis--vis its more focussed peers. The three-way split will correct this anomaly and is expected to lead to an overall appreciation in the market value of the company.

Market View:
Most analysts have rated the stock as a 'BUY' on account of the rising cement prices. As the other divisions of the company are already performing well, the turnaround in the cement division is expected to give a boost to the bottomline of the company.

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