L&T share price plummets
18 Mar 2000
Larsen & Toubro, the leading Indian construction and engineering group, is preparing for some major restructuring. The company’s board has accepted a report by Boston Consulting Group to turn the company into a focused group with clearly defined business areas that will help it become a Rs 25,000-crore group in five years.
At the outset, the plan moots the creation of a separate division for the company’s cement business, stock market listing for infotech subsidiary L&T Information Technology, and an initial public offering in mid-2001 and reducing equity exposure in two subsidiaries. The company will enter the telecommunications sector with a subsidiary, L & T Telecom, with an initial investment of Rs 450 crore. This company will become an Internet service provider and will target a turnover of Rs 2,000 crore by 2005-2006.
The report has made a clear distinction between core business areas and thrust areas for the company. While businesses like cement, information technology and telecom will be its thrust areas, the core business will continue to be construction, E&C projects, heavy engineering, and electrical and electronics-related activities.
The objective of the restructuring, in the words of managing director and chief executive officer A.M. Naik, will be to increase shareholder value and take returns on capital employed to 20 per cent, from the current 11 per cent, in the next five years. This will be achieved through identification of core business areas and thrust areas, spinning off or selling non-core businesses, and a realignment of the portfolios of the companies in the group fold.
The plan consists of four key areas: shape and structure of the overall portfolio; value creation plans for each business; corporate and organisational structuring; and internal value-based management processes.
L&T has already merged the businesses of two subsidiaries, LTM and Audco, with its heavy engineering division. It has decided to reduce its exposure in two other subsidiaries.
Mr Naik has spelt out the plans for the cement business. There is no proposal to sell off the business as the worst is now over for the cement sector. In the years to come, cement is seen to be a profitable business, and the company wants to exploit the opportunities there. It is in this context that a separate subsidiary will be created and L&T may allow a partner to come in with a minority shareholding.
As regards the information technology unit, an expert team will decide on the public issue. It could be a rights-cum-public issue or an issue of American depository receipts.
The entire process of restructuring will be overseen by a special office set up in the company. This "implementation office" will function under a senior member of the board and will report the progress periodically to both the corporate management committee and the business management committees of the board.
Even as the restructuring programme is implemented, the company will continue to evaluate its other diversified operations and joint ventures from a value creation perspective. Exposure in certain non-performing or under-performing areas will be reduced.
The Boston Consulting Group is understood to have pointed out the lack of transparency and accountability, unclear portfolio, uncertain growth prospects and poor performance in several businesses as reasons for the stagnated growth of the company. Immediately, Mr Naik says, the company will initiate segment-wise reporting of profit and loss from the first quarter of 2000-2001.
The restructured entity will be an organisation ensuring transparency, accountability and management focus, says Mr Naik.