Larsen Seeks Sovereign Funds for Infrastructure: Corporate India

December 11, 2013

By Bhuma Shrivastava and George Smith Alexander

 Larsen & Toubro Ltd. (LT), India’s biggest engineering company, is in talks with investors to raise capital for a unit that builds roads, ports and other infrastructure to conserve cash.

The company is considering raising money from investors including sovereign and infrastructure funds by March for unit L&T Infrastructure Development Projects Ltd., Chief Financial Officer R. Shankar Raman said in an interview in Mumbai, declining to elaborate. Larsen said last month it’s considering the sale of some of L&T IDPL’s assets, including an initial public offering and listing in Singapore of some road projects.

Larsen wants to find additional sources for funding projects, reduce its own financial burden and raise its profile overseas with the listing of a unit. The step comes as Larsen’s interest costs almost doubled in the year ended in March and its operating profit margin was the lowest in four years.

“L&T is not selling distress assets, it is for discovering growth capital,” Raman said. “It has to monetize its assets so that L&T doesn’t have to put anything more from its balance sheet to complete existing projects and add on new ones.”

Shares of Larsen have risen 2.7 percent this year, compared with the 5.4 percent fall in the S&P BSE India Capital goods index.

Larsen will be competing with other companies that also have assets for sale, according to Viral Shah, an analyst at Angel Broking Ltd. in Mumbai.

‘A Lot of Sellers’

“There are a lot of sellers in the market and a limited number of buyers,” said Shah. “It would be difficult to command a premium on an asset in such a market unless it’s really very lucrative.”

Larsen has said it’s considering a listing in Singapore of some road assets of the unit L&T IDPL through a business trust.

A listing for its toll-road projects could raise about $700 million, two people with knowledge of the process said in September. The road portfolio of the company is valued at 220 billion rupees ($3.6 billion), according to the company’s website, with 12 operational projects.

Private equity fund Old Lane LP owns 2 percent in L&T IDPL. Larsen is trying to cut its stake in the unit to 80 percent from 98 percent, Raman had said in May.

The Indian government has been trying to encourage investment from abroad, including by sovereign funds in infrastructure projects. In September last year, the government said IDFC Ltd. and Malaysia’s sovereign fund would form a special entity for road projects in India.


GMR Infrastructure Ltd. (GMRI), an Indian builder of roads, utilities and airports, said in September it sold 74 percent stake in unit GMR Ulundurpet Expressways to Indian Infrastructure Fund of IDFC for 2.22 billion rupees. In April, IVRCL Ltd. agreed to sell its stake in three toll-roads and had also said it planned to sell stakes in some more projects.

Larsen has committed to invest 100 billion rupees in equity in L&T IDPL, Raman said. More than half that amount has been invested. The unit has developed and constructed the projects and now wants “secondary investors to move in to take on only revenue risk,” Raman said.

“And when they look into India, they can’t possibly see a healthier set of assets,” said Raman. “Others are selling to redeem debt.”

Larsen, which was founded by two Danish engineers in 1938, started with the import of machinery from Europe and then expanded to provide engineering and construction assignments. In 2011, the company split into different business units and subsidiaries as part of a reorganization to boost growth.

Portfolio Review

The company reviews its portfolio every five years to evaluate what is core for the business, Raman said. Engineering and construction is core and not dependent on other businesses such as electrical products, machinery, financial services, build-and-operate business and information technology, he said.

In 2011, it listed L&T Finance Holdings Ltd. after an initial public offering.

The company’s financial services, information technology and the business of building and operating toll-roads, ports and other infrastructure for specified concession periods under L&T IDPL are in separate subsidiaries, said Raman.

“They keep throwing annuity cash in good times and bad, neutralizing the risk of an erratic construction business,” said Raman. “As of now our call is to keep these assets as supports, but this is not cast in stone.”

Funding Opportunities

Assets that are not key to its main business can be monetized if there is a large opportunity elsewhere that needs to be funded, Raman said. Among the businesses that it could consider for sale to help raise funds includes L&T Infotech, he said.

“Our idea for now is to keep it and grow,” said Raman. “If we get a large acquisition opportunity that Infotech sale can finance, we’ll look at it. But it won’t be a mindless deal.”

The company had 110.3 billion rupees in cash and short-term investments as of March 31, according to data compiled by Bloomberg.

Larsen’s revenue will probably increase at the slowest annual pace in four years. Sales will rise 11 percent to 826 billion rupees in the year ending March, according to the median of 24 analysts’ estimates compiled by Bloomberg. Net income will decline for the first time in three years, according to the analysts’ estimates.

While India’s economic growth quickened last quarter from a four-year low on higher factory output, a revival is threatened by looming interest-rate increases to fight rising prices. After expanding at an average 8 percent in the five years through March 2012, the economy grew at 5 percent in the latest fiscal 12-month period.

“International investors have a difficult time assessing value of infrastructure projects in India,” said Raman. “Because the growth picked up very fast and then slipped very suddenly.”



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