Larsen Tourbo Restructuring

India’s largest publicly traded engineering and construction company, Larsen & Toubro Ltd, is planning a significant restructuring of its businesses—some 62 units under six divisions and three subsidiaries.

L&T’s power, shipbuilding and hydrocarbon businesses are being spun off as subsidiaries, while railways, defence and nuclear power businesses will remain under L&T’s fold.

“Each of our businesses that has the potential to bring in $1 billion in revenue and $100 million in profits before tax and interest will be spun off into separate businesses,” said Anil Manibhai Naik, chairman and managing director.

Naik said L&T, which is considering a foray into several new fields such as shipbuilding, defence equipment manufacturing, railway coach building and power, is in the process of finalizing the blueprint for the overall restructuring.

The company’s existing divisions are being reorganized into 12 verticals.
“We have not yet finalized the structure of L&T,” said Naik. “We do not know whether it will be made into a holding company and subsidiaries will do all businesses. Our focus is to divide various busineses into verticals to get operational efficiency.”

Admitting that the company has become complex, Naik said: “Adding to the existing complex structure will not bring talent or corporate governance to the company. We need to bring in certain focus on individual businesses.” The exercise will also unlock shareholder value, he noted.

L&T shares are trading at Rs2,258.95 a share on the Bombay Stock Exchange, well off their 52-week high of Rs2,728 in September, giving the company a market capitalization of Rs64,100 crore.

L&T posted annual revenues of Rs20,700 crore through March and has a healthy order book of around Rs37,000 crore.

The engineering and construction division of L&T accounted for 75% of its revenue last year, while the electricals and electronics division accounted for 11%, and machinery and industrial products 10%, leaving 4% for three other divisions.

The company has already set in motion the recast plan by forming L&T Power Projects Ltd and L&T Power Development Co. While L&T Power Projects will be the investment arm for all power projects, the other subsidiary will execute coal-fired and multi-fuel power plants. L&T already has a small presence in hydropower with 70MW under construction in Himachal Pradesh.

“The hydropower business will be under the construction division, as it is a construction-oriented business,” Naik said. He also said the company is actively considering managing nuclear power plants once the sector opens up for private participation. That division will continue to operate under the heavy engineering division.

“L&T Power Projects will remain a common vehicle for investing in hydro, nuclear and thermal power projects,” Naik said.

The firm’s foray into shipbuilding will be spearheaded by a new company to be announced by April 2008. While Naik would only say that the shipbuilding yard is likely to be located in one of three states—Tamil Nadu, Andhra Pradesh or Gujarat—Mint has learnt that L&T has picked Kattupalli port, in Tamil Nadu, for the Rs2,000 crore shipyard. L&T will own between 95-100% of the stake in the company.

The firm is also considering a foray into equipment manufacturing for the hydrocarbon sector—from drilling rigs to laying pipelines. The business will be spun off into a separate company that will look at opportunities in refineries, drilling rigs, petrochemical plants and pipelines as well as the gas business in India.

The firm’s defence manufacturing division will operate under the heavy engineering division, after the government grants it Raksha Udyog Ratna status, putting L&T on a par with public sector defence eq-uipment manufacturers and defence ordnance factories.

Naik said the firm was looking at developing products for hi-tech field weapons, such as 150mm and 175mm field guns, missile launchers, signalling systems and naval equipment.

The rail equipment manufacturing business, according to Naik, will operate as a division of the company that is considering entering coach manufacturing, signalling systems and developing the Delhi-Mumbai freight corridor. “In railways we are picking up small pieces that exist in the company like light signaling, railway electrification and civil work... and will combine all these to form one integrated railway group,” he said.

“Our idea is to create private sector mix of Indian Railway Construction Co. and Rail India Technical and Economic Services.”