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L&T: Restructuring… more delay?

Oct 16, 2001

Well, this surely is turning out to be a very long drawn out restructuring exercise. Larsen & Toubro (L&T), India’s leading EPC and cement company, has once again developed cold feet over selling a stake in its going-to-be-created cement subsidiary to a foreign multinational. According to unconfirmed newspaper reports, L&T is looking at the possibility of selling a stake to equity investors.

  • L&T: Attractive valuations? Let’s briefly revisit the L&T demerger plan.
    • L&T wishes to hive off its cement unit in a bid to unlock valuations of its profitable EPC (Engineering and Construction) business.
    • The cement business over the years has entailed very large capital expenditure, which has eaten into the cash flows of the company. As a result the company’s debt burden has increased significantly. A hive off would leave L&T with little debt and surplus cash flows (which could flow to shareholders).
    • The cement business is cyclical and highly commoditised. This has led to high volatility in earnings. The EPC business, which too is impacted by economic cycles but to a lesser extent, has however managed to turn in a much more stable performance on back of the rising construction activity. A hive off would thus improve valuations of the combined entity.

    What has changed since the company announced the plans to hive off its cement business to a joint venture?

    Though there is no doubt that the company wants to hive off the cement business, the manner in which it wishes to do so has been a topic of consistent speculation. First, it was said that leading global cement companies would buy into the company. Next came the issue of management control. And now finally, the company is said to be toying with the idea of selling the stake to equity investors (thus, aping Gujarat Ambuja).

    With the cement prices having risen substantially from the lows of early year 2000, L&T surely has time on its side. Profitability of L&T has improved dramatically in the first quarter this year, largely due to a jump in cement prices. This development has given L&T more elbowroom both with the investors and the analysts!

    There is no reason for L&T to not consider selling a stake to equity reasons. Indeed, L&T understands the cement business well and may not necessarily require inputs from a global player to operate in the domestic market. However, what is a matter of concern is the speed at which the restructuring exercise is progressing.

  • L&T: Analyst Meet Notes

    The uncertainty regarding disinvestment only seems to be increasing with time. The management needs to come clean on the issue and lay out a clear roadmap for disinvestment. Any delay will only weigh the company’s valuations. The stock presently trades at Rs 172, implying a price to earnings multiple of over 16x (on annualised 1Q results).

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