August 2012
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L&T may buy entire stake in Audco

India’s biggest engineering and construction conglomerate Larsen and Toubro Ltd (L&T) is planning to acquire the entire stake of US-based Flowserve Corp. in their 50:50 joint venture (JV) Audco India Ltd, according to an internal discussion held last week, to strengthen its core valves business.
The development was confirmed by three company executives who declined to be named as they are not company spokespersons. They said the company is reviewing its partnerships and will mostly seek majority shareholding in JVs going forward.
The $12.8 billion (Rs. 71,170 crore) engineering company simultaneously wants to exit from L&T Komatsu Ltd, a 50:50 JV, and disband its business agreement with Swedish truck maker Scania AB. The management perceives these businesses to have lost their potential to become core to L&T, according to one of the three executives.
L&T may buy entire stake in Audco
“The partnership with Flowserve is not helping us much now. L&T manufactures valves and Flowserve is merely lending its name. It does not make sense to share profits anymore,” said one of the executives. L&T is a big brand now and wants to strengthen its core businesses, valves being one of the most critical ones, he added.
Valves contributed Rs. 777.4 crore to the sales of L&T in 2011-12—the second highest revenue generator after switchgear, according to the company’s annual report for fiscal 2012.
L&T’s engineering and construction business gets nearly 60% of its valves has manufacturing units in Tamil Nadu. Audco India, from Audco India, which which began operations in 1962, reported a gross revenue of Rs. 586 crore in 2011-12.
“We do not comment on any market speculation,” an L&T spokesperson said by email. An email sent to Flowserve on Monday did not elicit any response.
L&T Komatsu, a 50:50 JV between L&T and Japanese firm Komatsu Ltd since 1998, manufactures hydraulic equipment such as excavators and components primarily used to dig trenches, for demolition and in mining. While Komatsu provides equipment design and some components to L&T, the company executives cited above said the Japanese partner has been slow in introducing new technology through the JV.
Gross sales of the JV stood at Rs. 1,615 crore for the fiscal year 2012.
“Komatsu is providing us with old designs vis-à-vis its Japanese counterparts. Moreover, for L&T, this is not a core business and it is not seeking to develop it as one either,” said one of the executives, adding that margins were thinning in the space and investing further for design upgrades was not an option L&T is looking at.
However, the price of land where L&T Komatsu has its plant is very high, and L&T will be able to sell its stake only if valuations are attractive.
Komatsu could not be reached for comment.
L&T’s business partnership with Scania was forged in 2007 to market its mining trucks. The Indian partner has since provided marketing and after-sales support to Scania India for its off-road vehicles.
However, Scania India—the Indian arm of the Swedish company established in 2010—has started manufacturing and marketing other kinds of trucks on its own in India. It has deployed 600 of its off-road trucks across India through the partnership, according to its website.
“If Scania is marketing its other vehicles, it can do the same for the mining trucks as well. The turnover from this business is very small for L&T. Again, it’s not a focus area,” said one of the executives cited above. He explained that capital freed up from some JVs and partnerships could be better utilized elsewhere.
Scania, however, said it wasn’t aware of the development and called it market speculation.
“Even if Scania is entering other segments of the Indian truck and bus market on its own, L&T will continue to play an important role in relation to Scania’s sales and service in the Indian construction equipment market,” said a Scania spokesperson in an email response to Mint.
Nirav Vasa, a sector analyst with domestic brokerage firm SBICap Securities Ltd, said L&T’s strategy “seems to be in line with the company’s stated strategy of getting out of non-core businesses and those in which it doesn’t have a leadership position. These areas are not only non-core, but also very small in scale for a conglomerate of L&T’s size”.
The company had exited from smaller JVs earlier as well, he added.
L&T sold its 50% stake in L&T Case Equipment Pvt. Ltd, its JV with CNH Global NV, last year. In 2009, L&T exited its JV with Demag Plastics Group by buying it out.
L&T had 128 subsidiaries, 18 associates and 14 JVs, according to its fiscal 2012 annual report, compared with 110 subsidiaries, 21 associates and 12 JVs in fiscal 2010.
“We will continue our growth momentum and all the marginal small businesses we would want to exit from…that we do from time-to-time,” L&T chairman A.M. Naik said in an interview to CNBC-TV18 in December 2010.
Sector experts, however, point out that while an exit will simplify the company’s operations as well as give it more operational control, it will also require the partners to agree to a common valuation.
A sector analyst said buying out partners will give L&T greater control over operations.
“Apart from consolidating its position, L&T will also be able to develop the business on its own terms,” said a Mumbai-based analyst at Edelweiss Securities Ltd, who did not want to be named citing the company’s policy. “But both the partners should agree and arrive at a common valuation for either purchase or sale of stake.”
Audco India’s net worth is estimated at around Rs. 1,000 crore, while L&T Komatsu’s valuation is pegged at Rs. 1,200 crore by sector experts.
One of the company executives cited above agreed an exit would neither be an “easy option” nor a “rushed” one since “some of these marketing joint ventures were directly adding to the company revenues and providing a nice cushion to the construction business, which tends to suffer in an economic downturn”.
To be sure, these JVS and partnerships are beneficial to the company one way or the other. “Scania and Komatsu are good adjuncts to have (in our portfolio) as they make us a complete solutions provider. Also, these marketing joint ventures straight away add to our top line and are derisking the projects (construction) business, which is at risk in an economic downturn,” said one of the executives cited above.
Meanwhile, even as L&T sharpens its focus on core businesses, it is simultaneously expanding overseas. It has signalled a substantial overseas push to fuel its future growth as it braces for declining domestic orders, with companies deferring their capital expenditure and investment decisions.
Naik told reporters at a briefing in May on March quarter earnings that the company was doing well in the United Arab Emirates and Oman, and was looking to improve its market share in Kuwait, Saudi Arabia and Qatar, while it had just “seeded its business” in Brazil and Turkey and was going to enter Iraq and Indonesia.
L&T shares ended Thursday at Rs. 1,474.50, up 1.57%, on BSE, having gained 48.18% in the year till date. The benchmark Sensex fell 0.4% to 17,657.21 points; it’s gained 14.25% in the year till date.
Source: Livemint

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