The recent announcement by Grasim Industries Ltd that it intended to make a public offer for a minimum of 20 per cent equity stake in L&T Ltd did not really come as a surprise. The move was anticipated ever since the company took over the 10 per cent equity stake from Reliance Industries, in 2001. No one really expected that the Aditya Birla Group's flagship company would make investments just to earn dividend income. Irrespective of the outcome to the public offer, which is more in the nature of compliance with the statutory obligation of the regulators, the change in the management of L&T is a certainty.
L&T's takeover will go far beyond unlocking of values for its shareholders from its various divisions.
Construction and engineering
The backing of the AVB group, which is in the expansion mode, will undoubtedly benefit L&T's engineering and construction arm. The cash rich group will help L&T to effectively go in for execution of mega projects. The presence of the group in various countries, especially in African and South-East Asian regions, will considerably help L&T to spread its wings globally at a more rapid pace than it is doing now.
While a new management at the helm of L&T will definitely have a beneficial impact on its EPC business, it will not make any impact at the industry level. One reason being that the construction industry in India is highly fragmented and there are many local companies operating at regional and state levels. L&T was already a giant in India though it was a little more than a pygmy compared to the global EPC companies. Even if L&T were to acquire Engineers India under the PSU disinvestment scheme it will add more versatility to the company and not make any significant impact to the industry.
Grasim's takeover will also give the group an entry into the fast growing area of Defence.
L&T's forays into this sector coupled with its experience will catapult the group into a leader in this segment in no time. Margins in this segment would be much higher than in executing or even managing projects.
Grasim's entry will also ensure better fiscal discipline in terms of tendering and execution. Financial asset management as well as project management has always been one of AVB group's strength. L&T's margins will likewise improve considerably. Cement is one of the key areas where the takeover will make a deep impact. Grasim will soon be having a cement capacity of 13 mtpa once its debottlenecking programmes are completed. In addition, it will now have control of L&T's 16-mtpa capacity. In effect, the AVB group will effectively control more than a fourth of the country's capacity.
For more details please refer to Projectmonitor Print Version (1-15 November).