Larsen & Toubro to spin off roads unit, invite pension fund buy-ins

As part of a larger strategy to restructure its business, Larsen & Toubro (L&T) will soon shift all its operational roads assets into a new entity and invite other pension funds to invest in it. The road assets are currently housed in L&T IDPL, in which L&T owns 97.45%; the Canada Pension Plan Investment Board invested R2,000 crore via preference shares that are compulsorily convertible into equity shares by 2018.

L&T chief financial officer R Shankar Raman told FE the company did not want to restrict itself to one partner. “Our discussions will not be limited to CPPIB but the pension fund may wish to help L&T create the new platform. In that case we will transfer these assets and the capital will be released back into the holding company,” he explained.

“CPPIB may wish to invest separately in the new entity, over and above what they have invested in L&T IDPL,” the CFO added.

In FY16, L&T IDPL reported a net loss of Rs 558.94 crore compared with a profit after tax of Rs 399.04 crore in FY15.

Essentially, the management does not want to sell the assets in a piecemeal fashion but build another platform. “We will have a mechanism by which we can develop a project and flip it over into this entity,” Shankar Raman said.

L&T has talked of monetising operational build, operate and transfer (BOT) assets in IDPL by end FY17. After this, it may look at new BOT assets from the capital that is freed up. Shankar Raman said it was critical the company did this because it expects the space to be active by 2019. “So far we have stayed away from bidding but we haven’t lost much since the opportunities are limited. But we want to ensure we are equipped when they come back,” he added.

The engineering behemoth, which had forayed into several areas such as financial services and technology, is simplifying the business structure to be able to rightsize capital allocation over the long term and earn a better return on equity. The benefits of associating with pension funds and insurance companies, the management believes, is that they are long-term investors not looking to withdraw capital in three or five years. L&T would like investors with a time horizon of 15 to 20 years in the new entity so as to be able to operate the assets.

While L&T IDPL — which houses 17 roads, a power transmission project and the Hyderabad metro — can operate the assets, it doesn’t have long-term capital. Moreover, attracting investors to IDPL, analysts believe, may be somewhat difficult because the entity houses a mix of good and bad assets.

In May 2014, L&T IDPL sold Dhamra Port — set up in a 50:50 joint venture with Tata Steel — to the Adani Group for an enterprise value of R5,500 crore.