Markets have always cheered a company’s move to sell off non-core business. That’s the reason Larsen and Toubro Ltd’s (L&T) shares rose by 1.7% following shareholders’ approval for the sale of its electrical and electronics (E&E) division. It lifted a relatively subdued sentiment prevailing in the counter, following estimates of a lower-than-guided order book during fiscal 2011.
The move was expected following the management’s decision to unlock value in several subsidiaries and restructure operations.
L&T’s focus area for the last several years has been its core projects business—engineering and construction (E&C)—where it commands a clear leadership. The E&C segment contributes about 83% to L&T’s stand-alone revenue and has a major share in its huge order book of Rs1.1 trillion.
In contrast, the E&E business has registered lacklustre performance in the recent past. It contributes barely 7% to revenue. Exports have been sluggish and rising raw material costs have dragged profitability. For the nine months ended December, the segment accounted for 7.2% of L&T’s operating profit compared with 9.1% a year ago.
Worse, the management has reiterated several times that tough business environment for E&E products due to the increasing proliferation of Chinese firms is making cost pass-through difficult. This is reflected clearly in the drop in operating profit margin to 13.4% during the nine months ended December, from 15.3% a year before.
“Exit from this products business will help focus on projects and release funds for ongoing projects,” says Shailesh Kanani, an analyst at Angel Broking Ltd.
With five manufacturing units under its belt, which make switchgears, metering systems and medical equipment, analysts broadly estimate the E&E segment’s valuation at about Rs8,000-9,000 crore.
Despite a cushy 0.4 debt-equity ratio, the sale proceeds could be used for L&T’s project pipeline.
A report by stock broking firm Sharekhan says, “As on December 31, 2010, L&T has undertaken various infrastructure developmental projects involving a cost in excess of about Rs61,300 crore and its equity commitment is estimated at Rs12,500 crore.”
While the deal has not been struck yet, media reports say L&T is in talks with France’s Schneider Electric SA and US diversified industrial firm Eaton Corp., among others. The company’s sound financial position does not necessitate a distress sale, and hence, it’s difficult to tell when the deal will be concluded.
But, when finalized, the deal would boost liquidity for the company, besides taking the stock up a few notches.