L&T & JVSL brew mix to protect business and receivables
Larsen & Toubro Limited (L&T) is planning to acquire a 3% equity stake in Jindal Vijayanagar Steel Limited (JVSL). An unrelated article has stated that L&T is considering setting up of a 2 m tonnes per annum clinker unit in the JVSL complex. This has been reported by a leading national daily.
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.
JVSL, an O P Jindal group company, owns and operates a 1.6 million tonnes per annum steel plant. The company has offlate been facing cash flow related problems in view of its large debt servicing costs and the delayed recovery in the steel sector.
L&T proposes to convert the Rs 650 m owed to it by JVSL into equity. This is likely to translate into a 3% equity stake in JVSL. L&T's move to pick up equity can be justified on the grounds that it has been awarded a construction contract worth Rs 10 bn by JVSL for a steel unit. Any souring of relations could lead to the cancellation of the contract and that would not go down well with either of the companies.
L&T's decision to build a clinker unit in the same complex indicates that the company is aiming to recover a part of the construction fee in the form of the slag that it will source from the JVSL plant. The move is well thought out and will ensure that while L&T will recover its dues (in kind), JVSL will be avoided the strain of cash outflows.
L&T's decision to buy equity in JVSL and also set up a clinker unit in the latter's premises is a unique way aimed at protecting both its receivables and new contracts. Whether the move will be a success or not will, however, depend on the recovery in the steel sector.
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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