L & T Cement Bidders May Be Losing Interest

Bidders for Larsen & Toubro's (L&T) cement division may be having second thoughts on going ahead with their bids, according to analysts. At a recent analysts' meeting, L&T told those present that Holderbank of Switzerland, French cement major Lafarge and Mexican giant Cemex were among those interested in its cement division.

L&T decided to hive off its cement business after the Boston Consulting Group (BCG) recommended that it do so.

Analysts said bidders are now less than anxious to buy the division for a clutch of reasons. First, L&T won't share management control.

Secondly, L&T does not have a strong presence in cement markets in the north and east, but only in the west and the south.

Thirdly, the Indian cement industry is caught in tough times because of excess supply, slack demand and poor price realisations.

Finally, any successful bidder would take at least two years to turn in profits.

Roland Walker, spokesperson for Holderbank in Switzerland, said he would not comment on this issue. Senior officials at Cemex and Lafarge too preferred not to comment.

N Sivaraman, general manager at L&T, rebuts the argument that management control won't be ceded by saying: "Ownership and the management structure would be decided in consultation with merchant bankers and the possible partners; and the ultimate decision would be taken by the board in the interests of L&T and its shareholders. It is premature to comment on this."

On the bleak prospects of the cement industry, Sivaraman said that the growth in demand in the first five months of this year had been lower by 3 percent owing to drought in some states.

"In any case, the growth in demand for cement is always considered in a block of 4-5 years and never on a single-year basis. From that perspective, the demand growth including during the current year would not be less than 9 percent, with the current year's demand likely to be 6-7 per cent," he added.

Sivaraman argued that since India's gross domestic product growth is unlikely to be less than 6-7 per cent in the coming years, the average growth in the demand for cement would be between 8.5 and 10.5 percent, which would make India one of the highest-growth countries in the world. "Thus global cement majors have been interested in India," he said.

On the point that the main markets of L&T are in the west and south where demand has grown by 2 and 3 per cent, respectively, in the April-August 2000 period while demand has grown by 18 per cent in the eastern region (where L&T does not enjoy a substantial market share compared with other companies, primarily ACC and Lafarge), Sivaraman said: "L&T is as affected as anyone else from the demand and supply angle."

Analysts, however, point out that cement despatches from L&T's Gujarat unit have fallen by 17,000 tonne during August versus August last year.

On the other hand, the company's main competitor in that belt, Gujarat Ambuja Cements Ltd, has recorded an increase in despatches of as much as 43,000 tonne in August 2000. This, analysts said, when consumption in the state has reportedly fallen by 24.16 per cent in August.

Analysts also believe that it would take approximately 2 years for the acquirer to start making profits from the cement unit. But L&T says the cement division always made "cash operating profit" and "adjusted for tax credit, has always made a positive contribution to the company's bottomline".