L&T goes the unconventional way to increase profits!
The heavy construction company is taking the lighter route to a happier balance sheet. What's it planning to build this time around?
Larsen and Toubro(L&T), one of the world’s largest construction companies, has decided to become asset-light and reduce its debt by Rs 30,000 crores in the coming years. But what exactly does being "asset-light" mean and how does L&T plan to do that? Let’s find out.
In order to increase their profits, companies have two options. They can increase revenues and/or reduce their costs. Usually, and quite logically, we think of increasing our profits by aiming for higher revenue. “Bada socho”, right?
However, with all the uncertainty around, companies are also looking at the other option: costs. And if cost-cutting is accompanied by various other advantages, it’s just the cherry on top.
Enter: The asset-light business model.
We all have Uber installed on our phones, right? Well, Uber does not own any of the cabs that you book. Have Swiggy and Zomato been satisfying all your food cravings? Even they do not own (most of) the restaurants you order from. They’re all asset-light.
An asset-light business model simply means not having a lot of fixed assets. Companies invest only one-fourth to one-third of the capital they would traditionally invest into assets, directing this investment into marketing and other core activities. It also helps the company in quick expansion.
ITC also recently planned to go asset light in its hotel business.
They will reduce the number of properties that they own and increase the properties that they manage. You see, more capital will be blocked if ITC constructs or purchases a property. On the other hand, if it simply takes up the project to manage properties for others, it can use the same amount of cash to put in multiple projects and earn more profit in the process.
Now that we know what the buzz around asset-light is, let’s come back to L&T.
Well “construction” and “asset-light” feel like two parallel lines. How can they ever meet? Can you make metro lines out of thin air? Let’s understand.
L&T is a construction and engineering company. Its forte is in building assets and big infrastructure projects, rather than owning them. However, it also has a lot of non-core businesses, by means of subsidiaries, associates, and joint ventures.
As of 2014, L&T had 119 subsidiaries and all of them were not engaged in the core business. For example, L&T Finance Holdings Limited, which is a registered NBFC; Larsen and Toubro Infratech which is a technology consulting and digital solutions company, and many more. Now, since L&T was the parent company, they had to invest capital, borrow money, and in case of losses, suffer.
Have a look at what the group chairman, AM Naik had to say in May 2016:
“Our idea is to minimize or reduce the capital employed...The central point is wherever there is a high capital-intensity business, either sell it, if it is not core and not important, or bring a partner, preferably financial, or at least minimize the likely impact on returns to the extent possible operationally and through cost reduction. So in short, we are going towards the direction of making the balance sheet as asset-light as possible."
Their intentions were pretty clear, wherever there is loss, cut it, sell it and move on.
Apart from these, the engineering giant has proposed to sell its Nabha Thermal Plant to the Punjab Government, which could reduce debt (jargonists call it ‘deleveraging’) by Rs 7,500 crores.
Along with this, they are also looking to invest in technology that can strengthen their core business as almost 75% of their revenues are generated from there.
Change is the only constant in this world, and when things aren’t going the way you planned, forcing them will only lead to your downfall (tweet this). However mighty you may be, adjusting is the key factor to growing. L&T understood this well in advance. Know any other company that has turned asset-light in recent times?
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