According to newspaper reports, Holderbank, the Swiss-based cement major has proposed to pick up a 50% stake in Larsen & Toubro's (L&T) cement company. L&T has been mulling hiving off its Rs 75 bn cement business into a separate 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.
The stakes in the Indian cement sector have been hotting up for some time. The sector was jolted out of its slumber when demand started to pick up in the domestic market and the French cement major, Lafarge acquired Tata Steel's cement plants. Since then the consolidation in the sector has been gaining pace. Several deals followed the latest of which involved the Tata Group, Associated Cement Companies (ACC) and Gujarat Ambuja Cements Limited.
After Lafarge, it is now the turn of another global cement major, Holderbank, to make a plunge in to the Indian market. The company is reported to have offered RS 33 bn to pick up a 50% stake in L&T's proposed cement subsidiary. L&T's decision to hive off the cement business is based on the rationale that it is a capital-intensive cyclical business that has over the recent years suppressed the overall corporate profitability even as its EPC division continued to do well. Ineffect, the move is likely to unlock value for L&T's shareholders.
L&T is the leader in the cement industry (though after the deal between Gujarat Ambuja and ACC it will no longer stay so) and has a reputation for its highly efficient plants. Therefore the entry of Holderbank may not lead to any dramatic improvements in productivity and efficiency. What it will however do is make available funds for future expansion plans. This will reduce the burden of financing fresh investment on L&T.
It will also lead to a substantial cash inflow into L&T, which could be utilised to pare down debt and invest in its EPC business. This could have a positive impact on the company's bottomline and also improve the prospects of its EPC business as it steps up investment in this are of business.
For Holderbank the deal is ideal. It will get an opportunity to make a backdoor entry into one of the most promising markets in Asia. Added to this will be the advantage of efficient plants and the large capacity base L&T commands.
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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