L&T subsidiary shows interest in troubled Jaypee, ploughs its own path

May be due to CPPIB on its board, say analysts

L&T Infrastructure Development Projects’ (IDPL’s) interest in insolvent Jaypee Infratech’s assets could be an early indication of a change in its strategy, one different from its parent, Larsen & Toubro (L&T).

Most analysts attribute this to the presence of Canada Pension Plan Investment Board (CPPIB) on L&T IDPL's board of directors. They expect this to be more evident in the coming quarters.

Jaypee Infratech recently said it had got insolvency resolution offers from L&T IDPL and four others. 

IDPL is not interested in the entire company but has given a proposal for Jaypee’s Yamuna Expressway project, without the real estate portfolio.

IDPL’s interest in this project, irrespective of whether it wins or not, makes for many firsts at the engineering conglomerate. “This would be the first time L&T or an L&T subsidiary will acquire something in recent years,” said Renu Baid, vice-president at financial services entity IIFL.

A spokesperson for L&T IDPL refused to comment for this report. CPPIB has invested Rs 20 billion in L&T IDPL. In two tranches, in June 2014 and December 2015. 

“As L&T IDPL has other investors, this could be a decision taken at that level to pick assets, especially distressed assets; the key thing to watch is if IDPL will churn assets later on,” said Nitin Bhasin from Ambit Capital.

This move is also different from parent L&T's stand to stay away from both distressed assets and build-operate-transfer (BOT) projects.  The Yamuna Expressway between Noida and Agra is a build-own-operate-transfer project. 

L&T's top management, on several occasions in the past has been vocal on staying away from such projects. They point to the aggressive bidding, among other risks involved in such capital-intensive and long-gestation projects.

The past two years have also seen IDPL go slow on adding BOT projects to its portfolio and this might be changing.

In a July 2018 analyst call, L&T officials said the company would not invest fresh equity in IDPL. 

"So, it is up to them (on whether to invest in hybrid annuity model projects) but the philosophy is that L&T would not like to invest any more equity in this portfolio," said Arnob Mondal, vice-president for corporate accounts and head of investor relations for L&T. Adding: "So, if they want to churn their capital and bid for projects, they will have to do it through whatever cash they have. If they require additional cash, they have to flip assets to generate that cash."

L&T IDPL seems to be doing exactly that. "It recently divested a few assets through the Infrastructure Investment Trusts route and has meaningful cash on its books. With the Jaypee asset, L&T IDPL might be looking to further churn and invest this new capital in attractive assets," said Baid. 

She also expects L&T's stake in IDPL to reduce further, with the CPPIB conversion into equity in the coming quarters.