L & T begins to focus

Remember the story of a couple of years ago? India's best known private sector engineering group, Larsen & Toubro, was planning to enter the steel making business. Big investor Jardine Fleming didn't like the idea, and said so loudly and clearly, by downgrading the company. Stung by this criticism, the L&T management issued a press release saying the institutional investor had no business telling the company what it should do and what it shouldn't.

It wasn't Jardine Fleming alone that down-rated the company. Several others felt the company was going adrift. The result: the L&T share, once considered a blue chip, plummeted, reaching a low of Rs 140. A better lesson would have been difficult to find. The management has changed its outlook.

Just take a look at the problems the steel industry is facing today. We're sure the L&T management is glad it did eventually decide to drop the steel project. What's even more heartening is that the company is beginning to focus. Two things it has done need highlighting:

• in September 1998 L&T sold its shipping division, which it should never have started in the first place, to US-based Millenium Management Company for a reported value of $40 million (over Rs 160 crore).
• in end 1998 L&T signed an agreement to acquire Narmada Cements from the Chowgule group.

     The company has also strengthened the business it's best known for -- engineering. It has begun bidding aggressively for the building of fertiliser plants, for example. It also has real opportunities in the power sector -- and can scale up profitability as well as revenues if it focuses on supplying equipment and building power plants rather than entering power generation.

This cannot be the end of the restructuring at L&T, which has been advised in this matter by McKinsey & Company. But there's an interesting point that we need to note. That's about the notion of utilising available opportunities that managers and some consultants are talking about today. Hey! Power generation is opening up, let's enter power! Hey! Telecom is opening up, let's enter telecom! And so on.
     In the past companies entered areas like steel, cement and shipping for precisely such a reason -- Hey! Here's a new business opportunity! In this haste to diversify, little thought was given to whether they had the competencies to run these businesses and whether these businesses would retain the rosy glow they did when they were first opened up.

Isn't it curious, therefore, that L&T has catapulted itself to the number one position in terms of cement making capacity with the Narmada Cements takeover, while it has had to drop the steel project and sell off its shipping division? One of L&T's most successful businesses is construction (the ECC division ) -- that made the difference.

Curiously (or perhaps not so curiously), the Chowgulev group, for whom shipping had some synergies with its mining businesses, rushed into the cement business and repented at leisure. Is there a lesson in this for the investments that companies are making into the newly opened industries today?