L&T: Hold and cut exposures once cement restructuring is over

Recommendation:Hold and cut exposures once cement restructuring is over

S.Vaidya Nathan

L&T's is now mainly a restructuring story, and a protracted one at that. But now the company seems closer to spinning off its cement business as a separate entity than at any time in the past. Three global majors -- Cemex, Lafarge and Holderbank -- have evinced interest.

The cement business is to be spun off as a separate company in which L&T's shareholders will get 25 per cent of the equity. The global strategic partner is to take 37.5 per cent against the 25 per cent proposed earlier. This may augur well for the cement business as the global partner would show greater interest and may eventually take control.

With a 15-million-tonne-capacity at present, set to go up another four million tonnes over the next two years, L&T, along with the Gujarat Ambuja group, will be one of the two big players in the cement industry.

Against this backdrop, it may be good to wait and take shares in the cement business and evaluate exposures in L&T later. The shareholders can, therefore, stay invested.

L&T continues to lead in its other major -- engineering and construction. It is well established in infrastructure projects and aims to have at least a 10 per cent share of road projects. This business may have a steady flow of earnings which may get a better valuation once the cement business takes off.

Barring the last two quarters where the cement business made a healthy contribution to earnings, it has been a drag on the bottomline. As for the financials, the company had a good first quarter in 2001-02. But it is difficult to now have an idea of the non-cement businesses' revenue and earnings profile.

One can be reasonably sure that it would be better than the cement-inclusive showing over the years. The cement business may get a decent valuation as it would be one of two big players with good operating efficiencies, established brand and a market share of close to 16 per cent.

For 2001-02 first quarter (April-June), L&T posted turnover of Rs 1,830.97 crore (Rs 1,663.34 crore in the same period of 1999-2000) and profits of Rs 65.07 crore (Rs 18.88 crore). In Grasim's case, the higher cement prices helped improve the showing, though it may also not be sustainable.

The stock now trades at a price earnings multiple of 17 times its 2001-02 earnings per share of Rs 12.7 on an equity of Rs 248.66 crore. The relatively higher valuation seems to be in anticipation of the restructuring more than anything else.