Naik divides L&T to rule the future

Conglomerates are sometimes referred to as “corporate chaos” because of the complex web of businesses they manage. Shares of these companies tend to trade at a discount compared to standalone businesses, as investors find it difficult to gauge a fair value of the diverse businesses these behemoths house. India’s engineering and construction giant Larsen & Toubro has found itself at the receiving end of some very tough questions for these very reasons as investors believe it has spread itself too thin.

Over the last six years, L&T has invested nearly Rs 30,000 crore in different businesses, some of which have yielded nothing. While the sluggish business environment can be partly blamed for this, in some cases the investments preceded the opportunities. Shipbuilding and defence are two such examples. Consequently, the return ratios have also taken a hit. The company has also suffered large losses on some of its infrastructure projects which were bid under private-public partnership. L&T’s return on capital employed (ROCE) fell to 11 per cent in 2013-14 from a peak of 25 per cent in 2006-07.

Today, investors see little value in an engineering and construction company running a software services business or a retail lending business. They don’t see merit in the company owning and running power plants, ports or roads either, as the company’s core is engineering and construction which accounts for 70 per cent of its revenues. While conceding that the company needs to rationalise its portfolio of assets and businesses, L&T Chairman AM Naik is clear that the company’s profitability needs to be cushioned as turnkey projects are high-risk and low on margins. It’s this diverse portfolio of businesses that has helped the company tide over difficult times. “In FY13, we made a profit of Rs 1,400-1,500 crore out of services, which represents 27-28 per cent of the Rs 5,200 net profit. This cushioned some of the very bad jobs.” Naik’s found a middle path to protect investor interest without scaling down the projects business.

Larsen & Toubro Limited