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Kumar Birla delivers a masterstroke

Arijit De

Kumar Mangalam Birla may have hit upon a goldmine with his Rs 7.66 billion investment in Larsen & Toubro.

At one stroke, not only will Birla be able to stall L&T's bid to pass on India's largest cement business to a multinational rival, he will also get access to a range of knowledge-based businesses: his new focus area.

Look at how Birla stands to gain: the sort of valuation L&T was seeking for its cement business could have seen one of the MNC suitors offer around Rs 30-35 billion for a 37 per cent stake in the 16-million tonne cement business.

If Birla ever chooses to make an open offer for an additional 20 per cent in L&T at the same price of Rs 306.60 per share, he will have to shell out a total of Rs 23 billion for a 30 per cent stake and possibly full management control in L&T. Birla group sources declined to talk on the issue.

Indeed, at such a price, even the financial institutions, which hold a 24 per cent stake in L&T, could be tempted to sell out, analysts said.

What, then, would be Birla's gain? The Aditya Birla group, in addition to the cement business, would get access to L&T's profitable wholly-owned subsidiaries like the Rs 2.38-billion L&T Infotech, and the Rs 970-million L&T Finance.

Besides, the Birlas would get control over varied other interests in power, infrastructure, leasing and even a tractors company: L&T John Deere, its joint venture with the American transnational.

Both L&T Infotech and L&T Finance are extremely profitable. L&T Infotech has over 90 per cent of its revenues coming from overseas contracts, and L&T Finance has seen its profit after tax double in the last fiscal. It has set up yet another subsidiary, L&T Capital, to expand its business.

But the impact on the cement business would be the greatest. L&T is India's largest player. Add to it Grasim's 12 million tonne, and the Birlas would have control over almost 30 per cent of India's active cement capacity.

The investment would also bolster Birla's ability to counter the ACC-Gujarat Ambuja combine, which has a production capacity of 25 million tonne and has price-controlling dominance in the northern and eastern markets.

While L&T Infotech will possibly complement the Birlas' new IT acquisition, PSI Data Systems, L&T's two finance arms will add strength to the already existing five financial services companies of the Birlas.

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