Mumbai: Larsen and Toubro Ltd (L&T), the diversified engineering and construction conglomerate, will restructure the group into nine business verticals that will act as independent companies with internal boards in its bid to be more competitive and offer a planned transition to senior management.
The group will also form a hybrid holding firm for effective management and to ensure synergies in a conglomerate that has at least 60 business units across the world, J.P. Nayak, president and director, told reporters on Monday. Mint first reported on the company’s recast plan in July 2007.
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“It is inevitable to reorganize at the time of intense competition,” Nayak said.
The restructuring is loosely based on the Indian government’s principle of assigning navaratna status to public sector enterprises, giving them greater autonomy than other state-run units to compete in the global market.
Other conglomerates such as the Tata and the Birla groups have also restructured themselves to carve out independent companies, with holding firms (Tata Sons Ltd and Aditya Birla Nuvo Ltd). Air India Ltd’s recent restructuring led to the creation of five strategic business units for the passenger airline, cargo and engineering, among others.
This is the second recast in 12 years at L&T, which earns around 80% of its revenue from engineering and construction, and has aggressively invested in new sectors ranging from shipbuilding to power equipment manufacturing. In 2005, the company separated its cement division and sold it to Aditya Birla Group. L&T had introduced the concept of treating different verticals as operating firms three years ago.
“In effect, this is decentralization of power wherein each of the independent companies will be run as autonomous units,” Nayak said. “These companies will be inducting external expertise on their board and making the decision-making closer to the business, instead of the parent company deliberating on its board meetings.”
“General Electric Co. (GE) successfully diversified its businesses by restructuring in a similar fashion,” Nayak said.
Chairman A.M. Naik has referred to L&T as India’s GE on several occasions.
The creation of nine independent companies will persuade them to become more aggressive, nourish talent by fast-tracking senior managers to independent positions and unlock value by allowing investors to choose particular businesses, said the managing director of the Indian arm of a foreign consulting firm.
He cannot be quoted as his firm does business with L&T.
It is common practice in the West among diversified conglomerates to incubate a business and later unlock value, allowing investors and senior managers to cash out, he added.
“The parent company has not been able to capture the valuations with an integrated model,” said Brijesh Koshal, managing director of Daiwa Capital Markets India Pvt. Ltd. “This restructuring will help them create and capture the individual valuations.”
L&T will form a hybrid holding company, Nayak said. “Unlike a pure holding company that has only subsidiaries, our hybrid holding company will have a mix of both—operating companies as well as subsidiaries,” he added.
The hybrid company will house the nine operating companies with separate profit and loss accounts. There will also be five subsidiaries, including L&T Infotech Ltd and L&T Finance Ltd, the second of which will be listed shortly.
Nayak clarified that treasury management will be undertaken by the parent, although independent companies will have their own finance divisions.
While the formal announcement was made after markets closed, investors didn’t react much beforehand. L&T rose 0.82% to close at Rs 1,662.55 on the Bombay Stock Exchange. The benchmark index, the Sensex, rose 0.76% to close at 19,151.28 points.
The reorganization is expected to yield a fourfold increase in revenue by 2015 from Rs 46,900 crore in FY10, according to Nayak.
L&T executives said the performance of the various companies will improve with greater focus, empowerment, transparency, stronger leadership and increased competitiveness.
The company had previously sold non-core businesses such as the ready-mix concrete and petrol pump businesses as a part of business restructuring, said R.N. Mukhija, adviser to the chairman.
“This (current recast) is purely an organizational restructuring and this is a must to face the intense competition and current business challenges,” he said. “Moreover, we need to do away with the complexities of the business.”
Mukhija said the business heads of independent companies can now transform into leaders, from merely looking into operational issues. The joint ventures of L&T would be coming under the respective independent companies.
Nayak said the boards and business heads of the independent companies have been put in place, without giving details.
A corporate centre will be established to nurture the “L&T brand, value, culture, and optimize synergies through key account management and shared services”, said an L&T presentation. “We will be able to develop a deeper leadership pipeline and attract lateral talent.”
An analyst who tracks the company at a domestic brokerage firm said on condition of anonymity that the company is creating independent firms for operational efficiencies.
Harini Subramani and Sneha Shah also contributed to this story.