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Birlas dig heels on L&T price

Rumi Dutta in Mumbai

The Aditya Birla group has ruled out an upward revision in the Rs 190 a share open offer price for Larsen & Toubro because it sees the offer price as "a fair valuation" of the engineering and cement conglomerate's scrip.

This followed a valuation of L&T conducted internally by Grasim, senior Birla group sources said.

Even Kumar Mangalam Birla, on the sidelines of a function here on Wednesday, said: "I am not increasing the offer price for L&T."

Grasim's appeal against the Sebi directive to put its open offer on hold is to come up before the Securities Appellate Tribunal on Thursday.

"While our open offer price is as per the Securities and Exchange Board of India guidelines based on the average prices of the previous 26 weeks, as per our informal valuation, we feel that Rs 190 a share looks a very realistic price, considering the financials of L&T and its subsidiaries on a consolidated basis," a source close to company said.

"The cement business of L&T should not be valued at more than $60-65 per tonne in view of the current industry scenario and the performance of L&T. The consolidated financial statements of the company also show a huge debt burden," the source added.

Birla executives pointed out that L&T had shifted part of its debt from the parent company to its subsidiaries' books last year.

So even though L&T's debt has come down in the past year to Rs 3,543 crore (Rs 35.43 billion) from Rs 4,263 crore (Rs 42.63 billion), its consolidated financials on March 31, 2002, show loans of Rs 4,978 crore (Rs 49.78 billion). Its net worth stands at Rs 3,343 crore (Rs 33.43 billion).

According to Birla executives, the engineering business of L&T can at best be valued at four times the earnings before interest, taxation and depreciation, while other businesses are at par with their revenue. Hence, the infotech business cannot be valued at more than Rs 250 crore (Rs 2.50 billion).

Senior executives at L&T refuted the allegations that the parent company had shifted part of its debt to the subsidiaries.

"Many of our subsidiaries are special purpose vehicles, and are not part of the mainstream business of the parent company. These companies raise money on their own. If a particular project fails, it does not lead to a process of recovering the money from L&T. This has been accepted by the financial institutions as well as by the rating agencies," a L&T source said.

According to L&T executives, the company offers inherent strategic gains to Grasim by virtue of its size, national presence, brand equity, apart from other aspects like plant efficiency and technological expertise. Hence, Grasim's valuation should also factor in such aspects, L&T feels.

In the Gujarat Ambuja-ACC deal, Gujarat Ambuja had bought the ACC shares at Rs 370 a share, pegging the valuation of ACC's cement capacities at around $130 a tonne.

L&T felt because of the financial strength of its balance sheet and the superiority of its plants, it should be valued even higher, taking its intrinsic value close to the Rs 306 a share that the Birlas paid to the Ambanis.

Fresh battle begins on brand equity

The A V Birla group has opened another front in its silent battle against the Larsen & Toubro management.

It is taking the first step to "smash the myth," as A V Birla group executives put it, that the L&T cement brand enjoys a premium over the Birla cement brands.

But this struggle is different. Both sides have jointly appointed market research agency ORG-Marg to conduct a study on the "brand equity index" of their cement brands.

The study was to be carried out in 20 major domestic markets, executives of the Birla group and L&T confirmed.

The study is the first step towards justifying Grasim's demand for a cross-manufacturing arrangement between the two companies.

The L&T management has been opposing the Grasim demand on the grounds that this will only benefit Grasim.

According to Birla officials, the study is bound to bring out the fact that Grasim commands a premium over the L&T brand in most of the major markets.

As per the Grasim strategy, the study will then form the basis of working on future strategies like production sharing, logistics management and joint marketing.

"The study will look at the relative strengths of the cement brands of L&T and Grasim, and will also examine two other rival brands for further comparisons," a source said.

The two companies had earlier formed a four-member task force to work on synergies. But with L&T feeling that the benefits of this arrangement were one-sided, the plan had not worked as the two companies had earlier wished.

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