Engineering and construction giant Larsen & Toubro (L&T) is working to maintain its long-term debt levels and keep its interest costs under check in a rising interest rate environment, Chief Financial Officer R Shankar Raman told Moneycontrol.
Raman’s comments followed L&T’s Rs 2,000-crore bond sale earlier this week, its first after three years.
Raman said the company’s strategy will be to be focus on businesses that are financed by working capital – money available for current obligations -- and will not entail any major fresh capital expenditure. A deviation in this strategy could be its planned capital expenditure in green energy, but that too may be financed by value unlocking in other businesses and may not lead to an increase in debt.
In the interview, Raman spoke about global factors influencing business, his expectations of the Indian central bank and how L&T is navigating the high interest rate environment. Edited excerpts:
Q: L&T has raised Rs 2,000 crore through a bond issue earlier this week. The company hit the bond market after a gap of three years. What’s the rationale behind the timing?
A: We have some normal bonds that are coming up for maturity. So this will be used for refinancing. There is nothing very strategic about the timing, it’s a routine transaction.
Q: The coupon rate for the bonds was fixed at 7.725 percent. How different is the rate from the earlier bonds that it will be refinancing?
A: I don't think it is substantially different; around plus or minus 10-20 basis points (One basis point is one hundredth of a percentage point). What is relevant to me is the rate that we are paying is appropriate in the current times. The short term paper is going at 7.3- 7.4 percent. Long-term, five-year paper is at 7.5-7.6 percent. What we have done doesn't seem to be off-key; it is good for the current times.
Q: How much of your debt have you refinanced in fiscal 2022-23?
A: There was some smaller amount which came up earlier in this year for refinancing. All put together, the total refinancing done is around Rs 2,000 crore-3,000 crore.
Q: What’s the total debt on L&T’s books? What will be the average cost of debt after this bond issue?
A: Funds raised through this bond will substitute maturing debt so the debt-equity ratio doesn't change for L&T’s standalone books. We had around Rs 20,000 crore debt in our balance sheet and it will continue to be around that. The weighted average cost of funding must be around 7 percent and thereabouts. We don't borrow much. We’re an AAA company so we get the best of rates.
Q: The recent amendment to the Finance Bill takes away long term tax benefits from debt mutual funds. There is a general concern that this may weaken demand for longer duration corporate bonds and impact the cost of raising funds. What is your assessment?
A: People will now get used to the fact that the yields on debt funds are going to be taxed as any other interest income. So my sense is that it's just a transitory because money has to find safe places to be employed, and people who need money for worthwhile purposes will continue to seek money. There may be some amount of price readjustments that will happen because an investor would have possibly factored indexation benefit or long-term capital benefit when he subscribed to a mutual fund. And the mutual fund, in turn, subscribes to all these corporate bonds, etc, as we still don't have direct retail subscription to corporate bonds of significant magnitude. So the mutual funds will possibly have to rejig their schemes.
There are several numbers that are being quoted about the volume of debt funds that will move either to equity or to any other scheme. Most of the retail investors, I guess, will move towards bank deposits in the interim. But the institutional investors won't go towards bank deposits because the money that they normally invest is short term. So it'll be mostly in liquid funds, and maybe some may put it into income funds. Ultimately, the mutual funds will start gathering the institutional surplus in alternative schemes, which will find its way to the corporate bonds.
Q: Will L&T review its strategy for its own treasury operations in view of these changes?
A: Most of our investments are all for a very short term because we only invest working capital surplus. Any long-term surplus that we have goes into businesses directly, not into treasury investments. So to that extent, we were never a candidate for long-term capital gains through these investments. I think, for most corporates, it will not really change the dynamics of their investment pattern.
Q: After L&T announced financial results for nine months ended December, it said in a presentation to analysts that savings due to Hyderabad Metro refinancing was partly offset by higher finance costs at the parent. What kind of impact are we talking about?
A: For the nine-month period, our interest costs have gone down contrary to the trend of interest rate movements. Our Hyderabad Metro project, which had raised construction financing from banks at a higher rate, post-construction, was able to repay all the bank loans with market borrowings through bonds. The cost of these bonds was less and since Hyderabad Metro had almost Rs 8,000 crore - Rs 9,000 crore of construction loans refinanced, the impact of that interest cost saving was moderating our overall interest rates even though interest costs of working capital etc. had actually gone up.
Q: We are almost at the end of FY23, with all the refinancing done so far at the company level and at Hyderabad Metro projects. Will there be any significant change in the interest cost in the next few quarters?
A: No, in fact, hopefully, through the next few quarters, we would try to repay some of the loans in our Hyderabad Metro project. So I would expect the interest rate to come down. The state government has sanctioned Rs 3,000 crore (as soft loans), we’ll repay the debt in installments. We also have some of the land parcels and property as a part of Hyderabad Metro which will be sold and the proceeds will also go to reduce the debt.
Q: The Reserve Bank of India’s Monetary Policy Committee will meet next week. There is an expectation that they may announce another increase of 25 basis points. What is your expectation?
A: There is talk of a 25 basis point increase but to my mind, rates are almost peaking. It could be anywhere between leaving it unchanged or increasing it by 25 basis points. I'm not privy to the factors they will consider to decide. But my sense is, it is not likely to go up by 50 basis points. They may pause, wait for things to show up a little more data-wise, and then do one more correction. Because if they fire the bullet now, in terms of the (rate) raise, then they will be out of any ammunition going forward. Unless something dramatically happens and you know, inflation goes to 10 percent, which I don't see to be the case.
Q: What about global factors? The Silicon Valley Bank (SVB) crisis caused some alarm, and assessment of systemic risks. How are you assessing the situation right now?
It only brought out the old asset-liability management issue, which is not something which is systemically unknown. I was also surprised by the swiftness with which things were taken control of; depositors did not lose money. Those who are banking with the bank did not suffer big losses. There was no run on the bank and affairs were controlled. The remedial measures, despite it being one of the larger banks, were very effective. I think today, if we were to talk to people in the US, I think they've gone past SVB.
Q: Last year, SN Subrahmanyan (SNS), chief executive officer and managing director of L&T, said that the company aims to be zero-debt by end-FY23, a goal you have also reiterated before. By when do you think you could reach that level?
A: In my mind, ‘zero debt’ is not nil debt. It just means that there is enough liquidity in the balance sheet to be able to pay off all the debt if push comes to shove. If you see the balance sheet that we put out in September, for the Rs 20,000 crore of debt that we had in our standalone balance sheet, we had almost Rs 20,000 crore worth of treasury investments. To that extent, I'm treating that as zero debt even though technically there is Rs 20,000 crore debt on the balance sheet. So when SNS or I speak about zero debt, we mean that we don't want to be, at a net level, excessively geared because our business is working-capital-intensive, we are moving away from capital-intensive ventures. We are in the process of unwinding all of those past assets that we built up. Whatever cash we will unlock, we have to pay it back to the providers of capital, be it debt capital or equity capital. I think if the business is going to move towards just working-capital-intensive business, those are financed by guarantees and credit lines. There is no need for any real long-term debt and we are not really looking for any major investments at this point in time other than that in green energy.
Q: There has been a slight shift in your ‘asset light’ strategy as L&T plans to invest in green energy now. What will be the capital expenditure for that?
A: We have factories already with us, we'll have to maybe invest in some equipment to get the new venture going. We're not looking at it as any major investment. Normally, we spend Rs 2,000 crore-Rs 3,000 crore on capex every year, maybe we will end up spending another Rs 1,500 crore- Rs 2,000 crore for green energy over a two-year period. We are doing enough to unlock capital already and should be able to finance all of this. I don't expect the net debt level to go up because of all of this programme.
Q: Traditionally, the fourth quarter is the strongest for L&T in terms of revenue and orders. How has the performance been?
A: I wouldn’t comment on this during the result season.
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