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More than three years ago, L&T CMD AM Naik had assured the media that the company has plans to unlock value for its shareholders by spinning off many of its operations into independent companies. However, nothing has really happened since then. Spinoffs would be of great benefit to shareholders
In the last Annual General Meeting (AGM) in Mumbai, held on Friday (24 August, 2012) Larsen & Toubro (L&T) chairman and managing director, AM Naik showed serious concern against the Chinese inroads in the supply of cheap power equipments to India.
Apparently, his views are also shared by others, notably by some German consumers who fear that they will themselves be losing their capability to produce top quality wares for the power generation if they continue to import these from China.
It may recalled, that in these very columns, we had also raised similar sentiments and had sought the government intervention in imposing at least a 20% duty on such imports from China, so that indigenous manufacturers like BHEL do not lose their edge. (Protection Vs power) It is gratifying to note that the GOI has now levied a 21% import duty on such power generating equipment which are said to be inferior in quality and the life cycle uncertain.
Set against this onslaught, Indian power equipment manufacturers have distinct disadvantage of delivery schedule due to their heavy domestic commitments. However, if they really wish to stop this Chinese intrusion, they would do well to augment their production capacity and set up expansion plans in new locations so that the growing demand can be met, instead of necessitating imports, regardless of origin, Chinese or otherwise.
In the meantime, L&T is now firmly set with its L&T Finance which has more than the adequate capital base, substantial business on hand besides vast experience. If and when RBI decides to issue new banking licenses chances are that L&T Finance will have a head start and be able to stand on its own feet in a short span. L&T companies have been successfully operating various businesses for a several decades now, and their new financing arm will have enough to work on.
Now comes the question of future plans of L&T as a conglomerate. More than three years ago, in one of the many interviews that CMD AM Naik gave, he assured the media that L&T has plans to unlock value for its shareholders by spinning off many of its operations into independent companies, with L&T as the apex body. Indeed, a very great and workable idea.
However, nothing has really happened since then. Except, of course, a much awaited bonus issue. Even when L&T Finance came up with its IPO, it did not give or make any special provision for allotment for L&T shareholders. There was no preferential treatment.
With this in the background, one has to take the news of unlocking value in the infrastructure firm and Dharma port with a pinch of salt. It may be noted that Dharma port is a 50:50 joint venture with Tata Steel.
A few years ago, when Reliance was split between Anil and Mukesh Ambani, the shareholders benefited greatly, as they were allotted shares of the newly formed units. Each one of these Reliance units are making headway in different areas, with varying degree of success.
As for L&T, having chosen AM Naik to continue to be at the helm of affairs for the next five years, time is ripe for him to make good his promise and create the independent units by effectively spinning off several of the units in the L&T umbrella. Such a move would probably give these units the freedom to expand and bring forth more profits for the group.
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US. He can be contacted at [email protected].)