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L & T to restructure...finally! - Views on News from Equitymaster
 
 
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  • Dec 10, 1999

    L & T to restructure...finally!

    Larsen & Toubro (L&T) has been advised by a leading management consultant to increase focus on engineering, construction and electricals.

    L&T is an engineering and cement giant with engineering contributing almost 70% to its Rs.74 bn turnover (in FY99) and with cement capacity of 12 m tpa among the largest in the industry. Besides, it also has an information technology subsidiary L&T Information Technology which is counted among the top 15 software companies in the country with 1,400 people.

    The Boston Consulting Group has submitted a report on the restructuring of L&T to its board. The report is believed to have suggested that L&T:

    • concentrate on its core businesses,
    • sell of a host of unrelated subsidiaries and associate companies,
    • restructure or sell off some of the business activities that do not fit into the core business matrix,
    • unlock values in its commodities and intellectual property related business and
    • rationalise staff strength.

    The reports basic emphasis is that L & T should remain focused on the engineering, construction and electrical businesses. Cement, which has been a major eroder of value, should be spun off into a separate company.

    The stake in L&T Information Technology (FY99 turnover: Rs.1.61 bn; net profit: Rs.368 m) has been recommended to be brought down through a public listing preferably on the Nasdaq.

    L&T Finance should either concentrate on infrastructure financing or shut shop. For the other businesses such as packaging, tractors, medical equipment and automation L&T should either enter joint ventures or sell out.

    The restructuring will definitely enhance L&T's valuation and enable the management to devote quality time and energy on the core businesses. What will be more interesting and decisive is whether the company is able to obtain the high valuations for the businesses it proposes to hive off particularly cement where the valuation has been put at Rs.60 bn.

    As per the report the projections for the engineering and software business for the year 2005 are: Engineering: Turnover Rs.250 bn; net profit: Rs.20-35 bn Software: Turnover Rs.30 bn, net profit: Rs.6.50 bn

    Market View:
    Analysts view the developments positively as the move is likely to lead to higher return on capital and shareholder value both of which have been concerns in the past. Therefore, they have flagged the stock as a 'BUY'.

     

     

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