According to newspaper reports, Larsen and Toubro (L&T) is planning to hive off its cement business into a separate company. It has invited five multinational cement majors to consider picking up a strategic stake in the new company.
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.
L&T had announced its keenness to divest its cement business into a separate company earlier this year. The move was aimed at consolidating the company's engineering, procurement and construction (EPC) division, a leader in domestic markets.
Over the last three years, overall profitability of L&T was suppressed due to a glut in the cement markets, even as the EPC division continued to generate large profits. Moreover, the cement division had been a drain on cash resources as L&T speedily set up cement capacity to become one of the largest producers of cement (capacity 12 m tonnes) in India.
The proposed spin off will unlock value of the EPC business, which was till recently over shadowed by the woes of the cement industry. The cement business will now be independently valued, reflecting market sentiment towards the industry.
The management's initiative is justified. Apart from unlocking value, the measure will help the management focus more on its core strength of EPC. The management of the new cement company, too, can focus on just one business – cement. This could enable both companies to post better performances in the future.
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.
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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