(Full text of statement. Contact details below.)
MELBOURNE, Jan 20 Asia Pulse - Standard & Poor's Wednesday affirmed its double-'B' foreign currency corporate credit rating on Indian-based Larsen & Toubro Ltd. (L&T). The rating reflects the sovereign credit risk of the government of India for foreign currency obligations (rated double-'B').
L&T's corporate credit quality reflects the company's demonstrated engineering and construction capabilities, high level of vertical integration, and considerable forward order book, mitigated by its exposure to India's currently difficult construction markets and a weakened financial profile that heightens the company's sensitivity to domestic economic shocks.
The board of L&T has decided in principle to restructure the company's cement business. However, the timing and the manner of implementation are yet to be finalised. These developments have been driven by a strategic review of L&T's business mix. L&T's position as India's largest cement producer, aided by recent acquisitions, has delivered substantial synergies with existing operations.
Cement demand, however, is highly correlated with construction activity. Accordingly, margin erosion, industry oversupply, and plant underutilization historically have undermined earnings; however, in the nine months to Dec. 31, 1999,
L&T has managed to improve operating margins to 16.5% from 6.9% in the previous period. The proposal currently being considered by the board is to restructure the cement business, including transferring the business into a subsidiary, which could lead to a potential listing and/or partnerships.
If implemented, this restructure will reduce L&T's exposure to the cyclical commodity industry, but will reduce the benefits of an integrated and diversified business profile. In addition, an initial public offering of L&T's information technology business is planned for 2001.
The company also is assessing an entry into other information technology and communication services. The capital commitment to possible internet services and limited band width access are likely to be moderate relative to L&T's overall capital expenditure.
The company is expected to maintain its existing core business lines of construction, engineering and construction (E&C) projects, heavy engineering, and electrical switchgear. Underpinning L&T's leading position in India's construction and engineering sectors is an established record of timely project completion within cost, quality, and time-frame parameters. L&T has managed turnkey projects and engineering fabrication for a range of applications, including transport infrastructure, housing construction industrial plants, power projects, and oil and gas plants, the latter which continues to be a major focus for L&T.
L&T has maintained an acceptable level of profitability given India's sluggish economic conditions, although earnings protection measures remain under pressure with weaker operating margins and higher interest charges. The prudential framework has weakened from previous conservative levels, with net debt-to-net capitalisation increasing to 45% in fiscal 1999 from 41% in fiscal 1998.
The most recent third-quarter profit results were lower than the previous period, a function of the decline in the growth of the capital goods sector, lower price realisations for cement, and higher interest costs. The forward order backlog stood at Indian rupee (Rs) 6,500 crores, and the order bookings in the nine months ended Dec. 31, 1999 registered a 3% increase over the previous period.
The outlook is stable. The rating outlook on L&T reflects the stable outlook on India's sovereign foreign currency rating,
(61) 3-9631-2073 Co