The management of one of India's largest conglomerates, Larsen & Toubro (L&T) has finally decided to demerge its cement business. The much-delayed decision is a vindication of the stand that a demerger would happen but at a suitable time.
There are several benefits that would result from the demerger. First, L&T will rid itself of a cyclical business, which had in recent years exerted tremendous pressure on its bottomline. The pressure was in terms of losses due to intense competition in the market place. Further the large borrowings taken by the company to fund the capacity expansion took their toll in the form of higher interest burden. Indeed, the company’s performance in FY00 suffered due to a sharp rise in interest expenditure.
A key fall out of the decision to demerge would be the unlocking of the value of its highly profitable engineering and construction businesses. This division has continued to generate profits all through the economic downturn (although towards the end topline growth declined significantly). However, due to the shadow cast by L&T’s cement operations, the EPC division’s financial performance was all but over looked. Now, with the demerger, the EPC division would once again be valued on its own.
Meanwhile, the cement division would benefit from the likely induction of a strategic partner. This would help the new entity in meeting its capital expenditure plans to boost capacities and adopt the best business practices to enhance productivity.
However, several issues as yet remain to be tackled. First is the modus operandi of the demerger. The kind of valuation would be given to the cement business. Then, the question whether, and if yes, when, does the company plan to invite a strategic partner. Finally issues relating to independent listing of the new entity will need to be answered.
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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