Cementing the business, the L&T way

By Ramnath Subbu

MUMBAI, JULY 8. Larsen & Toubro's (L&T) decision to demerge its cement business in the next eight months is seen as a step in the right direction in corporate circles. The move is part of a restructuring plan announced earlier this year following the recommendations of the Boston Consulting Group (BCG).

Under the plan, the company plans to increase capacity to 22.5 million tonnes by 2005, up from 10.65 million tonnes now. The plants in Madhya Pradesh, Gujarat and Andhra Pradesh would, by then, have attained capacities of 6 million tonnes each followed by Maharashtra with three million tonnes and the facility of Narmada Cement of 1.5 million tonnes.

The BCG, in its report, had recommended transfer of the cement business first to a subsidiary which could later lead to potential listing and/or partnerships. Such a restructuring is meant to balance L&T's exposure to a cyclical commodity industry while at the same time providing the required additional resources to maintain industry leadership.

In cement, the operational initiative comprises further improvements in cost competitiveness in clearly defined areas and an increase in the production capacity of current assets by nearly 50 per cent. The areas include upgradation of existing capacities, change in product mix, addition of grinding units in select high price realisation locations and brownfield expansion which will result in more than 8 million tonnes of capacity increase. The increase is planned in a phased manner over the next three to four years with a minimal capital expenditure of only $ 40 per tonne (Total capital expenditure estimated to be around Rs. 1,000 crores).

The planned capacity augmentation follows the company's already successful exercise in this regard. This would, in turn, increase the company's relative market share from around 11 per cent today to well over 15 per cent by 2005 , well in line with its aspirations to remain the market leader.

Further, L&T plans to commission a grinding unit at Arakonam in Tamil Nadu with a capacity of one million tonnes, likely to be operational in the next six months. The clinker for this will come from its Tadpatri plant in Andhra Pradesh. The company will invest Rs. 140 crores in a grinding unit in West Bengal which will get the clinker from the Hirmi cement facility in Madhya Pradesh. The company's cement capacity will go up to 19 million tonnes by 2003 and 22.5 million tonnes by 2005. L&T has three bulk terminals on the coast including one in Sri Lanka. It has its own port in Gujarat for cement. It also has captive power plants at all its cement facilities.

The company has already taken steps to reduce manufacturing costs in its operations, particularly in relation to power and coal. Also, attempts are being made to reduce freight costs by commissioning bulk cement terminals in Mumbai and Mangalore and by chartering special ships to feed these terminals.

As things stand, cement accounts for a little over 25 per cent of the company's turnover and it would make economic sense for the company to demerge it. Also to be considered is the fact that domestic competition is much more fierce now with more than a handful of players with capacities over 10 million tonnes per annum and also the presence of global players like Lafarge which are hungry for market share.

L&T's cement division's gross margins are around 16 per cent and it would be desirable to shore them up to 24-25 per cent before transferring the business to a new subsidiary. This would not only increase shareholder value but also improve the valuation of the business, currently at about $ 1.3 billion. It would also seem sound to demerge the business after completion of the on- going expansion plan by 2.25 million tonnes.

It is felt that at the current capacity, the company could get a price of Rs 4,900 per tonne for its sale. And once the additional 2 million tonnes are in place next year, the value of the cement business could be around Rs. 7,800 crores. This could be a major deterrent for potential partners trying to buy out the cement business.

Meanwhile, on the industry front, there is good news with the announcement that cement dispatches for June are up 9.8 per cent to 9 million tonnes from 8.2 million tonnes in June 1999 and production during the month was up 7.3 per cent at 8.8 million tonnes. But production in the first quarter of the current year has grown by a mere 4.1 per cent over the same period last year when it grew 22.6 per cent over the previous year. Dispatches too grew by 4.9 per cent in the period against 22.1 per cent in the April-June 1999.

The growth shown in June is a positive sign as in the first two months of the quarter (April and May) owing to drought conditions prevalent in various parts of the country.

There is some optimism that in the current year the growth rate would be better than the historic rate of around 8 per cent. This would largely be on the back of greater infrastructure thrust and the boost given to urban and rural housing in the last budget.

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