Engineering major Larsen & Toubro Ltd will be booking a profit on the much-awaited sale of its stake in its infrastructure development arm, L&T Infrastructure Development Projects Ltd (L&T IDPL), Dip Kishore Sen, Wholetime Director and Senior Executive Vice-President, Development Projects, said.
L&T, along with the Canada Pension Plan Investment Board (CIPPB), signed a pact with Infrastructure Yield Plus, a platform backed by Edelweiss Alternatives, for the sale of L&T IDPL for an enterprise value of around Rs 6,000 crore.
L&T has adopted an asset-light strategy, which entails exiting some non-core businesses like IDPL.
In an exclusive interview with Moneycontrol’s Rachita Prasad, Sen shared his plans for the other two divestment targets of the company — the Hyderabad metro project and Nabha Power. Sen said that L&T will invest in developing projects in new segments. Edited excerpts of the interview follow:
Industry expectation of the IDPL deal size varied from Rs 4,000-7,000 crore. Please explain how you arrived at an enterprise value of Rs 6,000 crore? What profit will L&T make on this deal?
We built this asset portfolio over 20 years. We have been pioneers in developing an infrastructure investment model. We went on executing one project after another as the industry and the government wanted private developers to come into the sector.
In this process, we developed about 15 roads and one concession-based transmission line project. We have already divested some other projects.
CPPIB invested in L&T IDPL and has over the years increased its stake to 49 percent. The cash component of the deal, before closing adjustments, is Rs 2,723 crore which will be shared between CPPIB and L&T, while the debt and other liabilities will remain with IDPL.
I will not disclose the amount but L&T will make a profit on this divestment. L&T and our partner CPPIB had stopped investing in new projects in the last 3-4 years, but the business has great credentials in roads, railways, high-speed transport, and other infrastructure segments. The new owner is keen to grow its portfolio, which gives us the confidence that this asset will do well with them.
L&T has plans to exit development projects and be asset-light. Does this deal mean that L&T will no longer look at infrastructure projects as a developer and only be a contractor?
We want to have an asset-light structure but we have also been announcing investments in new-age assets. We are exiting non-core assets and do not have any plans to invest in fossil fuel-based projects, road infrastructure, or any other concession-based infrastructure projects, in the near future. We will be investing in data centres, green hydrogen, and other new-age businesses like startups in the e-commerce space.
These news businesses are currently supervised under the corporate strategy group but once they gain scale and shape, there will be some kind of reorganization within the group.
What about L&T Hyderabad Metro and Nabha Power Ltd? Would the divestment of these assets be possible by March?
We are financially restructuring L&T Hyderabad Metro and making sure that we reduce the debt substantially to make it viable and profitable, apart from taking various strategic initiatives to increase revenue and make it attractive for investors, and then pare our stake gradually.
As for Nabha, we are looking to get better valuations. Nabha has been a very good and self-sustainable asset for us. It is one of the best power plants in the industry with high plant availability, high plant load, efficiency, etc. We are in discussions with a few parties and as part of the process, we have already refinanced the L&T-guaranteed NCDs and commercial papers as a commercial loan.
You have been in talks with the state government to reduce the debt burden of L&T Hyderabad Metro. What is the situation there?
We had debt of over Rs 13,000 crore in the project. We were incurring losses and it came to a stage that we would have had to close it unless we received some help from the government. We requested the government to help us with long-term soft loans, which they agreed to in lieu of the claims from project delays (due to issues at the government’s end) after long deliberations, considering that the public is the biggest beneficiary of the project.
With the help of a government loan of Rs 3,000 crore, along with real estate and TOD (transit-oriented development) monetisation proceeds of Rs 2,000 crore, we will reduce the debt to Rs 8,000 crore. We are also in advanced talks with some private equity companies for around Rs 2,000-3000 crore of equity investment in the project.
Also, the entire debt, which comprised commercial loans, has been restructured as L&T-guaranteed bonds. This has reduced the interest substantially, from about 9.5 percent to 6.5 percent, reducing the cash outgo. We also expect the traffic to go up to over 5.5 lakh passengers per day from 4.5 lakh now.
With the coming together of all these factors, we hope to make this asset self-sustaining. We hope to reach zero-loss levels by the end of next year or by FY25.
What will be the loss from L&T Hyderabad Metro in FY23?
We have already factored that in our quarterly financials. I think it should be around Rs 900 crore this year, which is much lower than the Rs 1,800 crore annual loss seen over the past couple of years.
India needs to spend about $1.4 trillion to emerge as a $5 trillion economy by FY25. For this, public sector investment alone will not be enough. But there aren't too many private sector companies who have the appetite for public-private partnership (PPP) projects. To make things worse, we are staring at high interest rates. What can the government do to encourage private sector participation in infrastructure?
I have been speaking at various industry forums and have spoken to the ministry. This is a problem that the government has to solve. If you see the NIP (National Infrastructure Pipeline), out of the planned investment of Rs 111 lakh crore, roughly Rs 25 lakh crore of the capex will come from private companies.
Private companies have shown lukewarm response. There are a whole lot of problems, some of which have been solved by the government but some are yet to be.
The government has already announced correct policies for Foreign Direct Investment (FDI) and arbitration, among others, but now they need to be actualised. Programmes like the Pradhan Mantri Gati Shakti (PMGS) scheme are very good — the fact that the government will address everything on one platform is helpful. But frankly, a lot needs to be done to ensure we hit the road running. Private companies have the money, but they are investing in projects where there's no risk of construction. The government needs to solve the problems and ensure that revenue risks are addressed.
The upcoming budget would be the last budget of the current dispensation. Do you expect any major announcements for the infrastructure sector?
Of the Rs 7.5 lakh crore capex to be spent by the government, around Rs 4 lakh crore was already spent by November and the rest may be consumed in the remaining months of the current fiscal. Nowadays, the government is inviting bids for assets after 100 percent land acquisition is done. That's a good thing.
But at the state level, another Rs 7.5 lakh crore worth of projects was supposed to be initiated, but only Rs 2 lakh crore has been spent as of Nov '22. That's a big area where the government has to really see how it can help the state government raise funds.
States must be incentivised for transit-oriented development or other projects to encourage them to put in more money and generate money. (Transit-oriented development aims to concentrate jobs, housing, and services around public transport stations.)
The centre has done a good job monetising assets, and they can help states to do the same. The budget must look at ways to encourage states to invest money in infrastructure and incentivise the private sector to come back to development projects. Some states are doing a good job, but there could be better coordination between the centre and other states.
The government has prioritised infra spending after the pandemic and come out with policies with the right intent. We hope public capex will be hiked to Rs 10 Lakh crore in this year’s budget.
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