Larsen and Toubro has been advised by the Boston Consulting Group (BCG) to issue shares of the proposed cement subsidiary to existing shareholders. The shares are to be issued at no cost and will be listed separately on the stock exchanges.
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 consultancy firm has also advised that the company look at offering the new partner a stake that is comparable to its own holding. This move is likely to invite better valuations for the company. The other alternative for the company would have been to retain the entire stake and offload a part of it to the new partner. This would have led to cash inflows into L&T. Once the hive off is cleared L&T's cash requirements would dramatically reduce as capital expenditure needs diminish. Thus the advice to return 'funds' to the shareholders is justified.
In view of the interest shown by international cement majors in the Indian economy, valuations of cement companies have received a boost in recent times. If L&T were to offload an equivalent stake to the new partner it would definitely get a better price. This is mainly due to the fact that the new partner would become the defacto leader in the cement industry.
The move to hive off the cement business will help unlock the value of L&T's EPC business. Moreover, the need to fund large capex (new cement plants) would diminish leading to an improvement in the company's cash flow position. Ineffect, the company would be separating a commodity business (cement) from its 'premium' EPC business. This would reduce the volatility in the growth of earnings.
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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