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L&T shelves expansion plans - Views on News from Equitymaster
 
 
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  • Aug 13, 1999

    L&T shelves expansion plans

    According to newspaper reports, Larsen & Toubro Ltd. has shelved its cement and clinker expansion plans for the time being and decided to consolidate its position in the industry. In a bid to improve its competitiveness in the market, the company has also hired the services of The Boston Consulting Group, an international consulting firm. The report on the overall operations of the company, as prepared by BCG is expected by November 1999.

    L&T is the largest engineering, procurement and construction (EPC) company in India. The engineering division is the largest contributor to the company's topline (60% of total revenues). Besides this, L&T has major business interests in cement (22% of total revenues, capacity 12 mtpa) and software.

    L&T has vigorously added cement capacity over the last eight years and has grown to become one of the largest producers of the product in India. However, over the last three years, this division has been a major drain on the company's cash flows. This was mainly due to falling cement prices, which reduced internal cash generation, and huge capacity expansions that were then under implementation.

    The decision to shelve the expansion plans has come at a time when the cement sector is witnessing renewed interest. There has been a sustained recovery in the demand and price of cement over the past eight months. This, besides improving sentiment in the industry, has lead to a substantial improvement in cash flows generated from the company's cement division. The company is however in a comfortable position to meet the increased demand from its existing capacities (current capacity utilisation level is approximately 80 - 85%).

    However not all is rosy in the sector. Despite the recent firming up of prices, there is a fear that the recovery in prices may be short lived as leading players, including ACC, having already firmed up expansion plans.

    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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