Engineering major Larsen & Toubro (L&T) has decided to initiate a fund-raising exercise, one of the largest in the space in recent times, for its wholly-owned infrastructure development arm L&T Infrastructure Development Projects (L&T IDPL).
L&T had mandated Morgan Stanley to help it raise $400-500 million (Rs 2,200-2,750 crore at Rs 55 to a dollar) for a minority stake in the company from financial sponsors like large sovereign funds or long-term infrastructure-sector-focused private equity investors or even deep-pocket global pension funds, said people familiar with the ongoing discussions.
“We are looking at possible partners for the next phase of growth of the company,” said
L&T Infrastructure Development Projects portfolio (as on March 2012)
|Roads & bridges
|Urban mass transportation
1 Metro rail project
|Rs 21,600 cr
|Rs 5,700 cr
|Rs 16,400 cr
|New sectors: Water projects, Power transmission
R Shankar Raman, L&T Group CFO who is also in the board of the company as a director.
“That way, it won’t strain L&T’s consolidated books. Our philosophy is all the capital-consuming businesses within the group should be placed independently in the market. We have incubated L&T IDPL for 15 years. Now we would like to put it in its own growth orbit.”
L&T IDPL, at present, handles a portfolio of infrastructure assets worth about Rs 45,000 crore, which includes 19 road projects, three ports and a metro rail project. Out of that, Rs 16,400-crore Hyderabad Metro project is one of the most ambitious BOT (build operate and transfer) asset. The company has also partnered with Tata Steel for an equal venture for the Rs 3,000-crore Dhamra Port, with a debt equity of 2:1. It is among the top two road developers in the country.
As on March 2012, the net worth of L&T’s developmental projects was Rs 9,540 crore and its debt stood at Rs 8,841 crore. The lion’s share of this will be L&T IDPL’s, said company officials, even though this would include the liabilities of its power project as well, which is separate.
Sources close to the developments said, even though a formal valuation exercise is yet to get completed “and the company has not zeroed in on any number”, the initial back of the envelope calculations suggest that the equity valuation of L&T IDPL alone would be in excess of Rs 11,000 crore ($2 billion). L&T may dilute anything between 12-20 per cent, depending on investor appetite.
Considering the company still has to undergo significant capex and some of its flagship ventures will take at least five-seven years to reach cash flows, only long-term investors would be approached. Marquee financial investors like Temasek, Actis, 3i, CVCi and some of the other sovereign and pension funds have already been sounded out.
Braving all odds and negative sentiment around the sector, L&T is raising private money in the company instead of tapping public markets. This would not be the first time that L&T IDPL would rope in sponsors.
In 2006, IDFC and JP Morgan Chase had bought 21.6 per cent in the company for Rs 550 crore at a valuation of Rs 2,500 crore. Subsequently, they pared down their stake to 14 per cent, before exiting completely in 2010, after L&T bought them out for about Rs 740 crore, valuing L&T IDPL at Rs 5,300 crore.
After listing the financial services company, L&T had made its intentions public that by FY13, it would also try to list its cash-guzzling infrastructure arm.
“The company needs an equity infusion as it has large debt in its books,” said an official aware of the ongoing plans. “Even though they are all housed under various project level SPVs and have no recourse to L&T, but on a consolidated level, the leverage impacts L&T’s credit ratings.”
The Hyderabad Metro alone, for example, would need close to Rs 12,000 crore of 10-year project debt.