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Komatsu set to buy out L&T Stake in joint venture, deal likely to be valued at Rs 600-700 crore

 Komatsu set to buy out L&T Stake in joint venture

MUMBAI: LarsenBSE -0.49 % & Toubro (L&T) is in the final stages of negotiations to sell its 50% stake to Japanese partner Komatsu in their hydraulic equipment manufacturing joint venture, L&T Komatsu. The decision signals the Mumbai-headquartered firm's desire to exit non-core businesses at a time its core engineering and construction operations are under severe stress.

L&T Chairman AM Naik and top officials from Komatsu were engaged in hectic negotiations in Mumbai last week and have agreed on a valuation of Rs 600-700 crore for the business. 
JP Nayak, advisor to the chairman and the key architect behind the restructuring plan, was also part of the talks.

"There were marathon meetings with Japanese executives that lasted for almost 15 hours. The deal seems to be nearing a conclusion," said a person close to the transaction.

An L&T 
spokesperson declined comment on the issue. "As a matter of policy, L&T does not confirm or deny market speculation."

L&T Komatsu 
CEO S Gopal did not reply to queries on the subject.

Deal Excludes Bangalore Land

The proposed deal excludes the land in Bangalore on which L&T Komatsu's manufacturing plant is located. Komatsu may have to relocate the plant and machinery to its manufacturing facility in Chennai, said the person quoted above. "This could have been included in the final draft of the deal."

 

L&T, which is transforming into a leading real estate player, will use the land to build residential and commercial properties. The diversified conglomerate has already rolled out its first real estate project in the south — L&T South City in Bangalore. L&T Realty owns 1,200 acre across the country. Komatsu wanted to buy out its partner last year, but differences over valuation and the fate of the land became major roadblocks. The Japanese partner is understood to have agreed on the transaction now as it seeks to expand its presence in India.

In a recent presentation to analysts, L&T acknowledged that the portfolio diversification has partially mitigated the cyclicality of the business. The concern, however, is whether the changing profile of the business will hit profitability.

About 53% of L&T's order inflows and 49% of its order book for the nine months ended December 2012 came from infrastructure, which includes construction of roads, bridges, buildings and factories. This is more than double the share of infrastructure 10 years ago. The share of process, power and hydrocarbons has dwindled due to the slowdown.

"The key concern is whether the changing profile of business will hurt profitability. Despite a challenging macro
environment, strong order inflows into the buildings and factories segment have been a key reason for L&T managing a 12.5% y-o-y growth," Nomura said in a research equity research report.

In the past four years, L&T sold a number of businesses such as a tractor joint venture with John Deere and a ready-mix concrete business to 
Lafarge. It also exited its 17.5% stake in Bangalore airport.

Komatsu's India connection dates back to 1965 when it had procured an order from the 
ministry of defence to build crawler tractors. Komatsu teamed up with L&T in the mid-90s soon after the winds of liberalisation threw open opportunities in fields such as mining. The joint venture company posted gross sales of Rs 1,615 crore during the last fiscal.