Engineering major Larsen & Toubro Ltd (L&T) aims to close at least two of its major divestment plans to become a zero-debt company, excluding the debt of its non-banking financial arm L&T Finance, by the end of 2022-23.
SN Subrahmanyan, chief executive officer and managing director of Larsen & Toubro, told Moneycontrol in an exclusive interview on May 13 that the company has made significant progress in divesting three of its non-core businesses, one of which is the loss-making L&T Metro Rail (Hyderabad). He said that these assets would be moved out of L&T’s balance sheet by the end of the current fiscal.
“L&T’s overall debt is Rs 1,24,000 crore, out of that Rs 84,000 crore is from L&T Financial Services, which is not really a debt but their borrowing so that they can lend. So the real debt was Rs 40,000 crore. If Hyderabad Metro’s Rs 13,000 crore debt and Nabha power’s Rs 6,000 crore debt move away, all we have is a debt of Rs 20,000 crore, which is what is the working capital requirement of L&T. We can become a zero-debt company by the later part of the year,” Subrahmanyan said.
As a part of L&T’s strategic plan for FY17-21, the company aimed to exit some non-core assets and focus on its core competence of engineering, procurement and construction jobs and services and become an asset-light company. In May 2018, L&T announced a deal to sell its electrical and automation business to France-headquartered Schneider Electric for Rs 14,000 crore. The deal was finally closed in August 2020.
The company also announced its intent to sell the other three assets but is yet to conclude them.
The worst may be over for Hyderabad metro
L&T, through subsidiary L&T Metro Rail (Hyderabad), built the Rs 18,000-crore project that has a concession period of 35 years, which can be extended. The project was initially delayed due to the right-of-way issues and other approvals, leading to cost overruns. Then the revenue from the project did not match initial projection and was further hit by the Covid-19 pandemic. This loss-making project has weighed on the overall financial performance of the parent company.
“Two factors that were not going well for the project. One, a lot of people were not traveling to the office due to Covid. Traffic had gone down very drastically, now it’s sort of coming back. As we speak, it's about 300,000 people per day. The second issue was the huge debt of nearly Rs 13,000 crores, so there was interest cost,” Subrahmanyan said.
“In our profit and loss account, this project was probably the only loss making business we have.”
L&T had last year sought financial support from the Telangana government to deal with the financial stress, citing that the losses would make it impossible to continue operations. After much discussion with the state government, the latter has agreed to give the project a soft loan of Rs 3,000 crore which over come over a period of time. This will be used to repay debt and reduce it to Rs 10,000 crore.
“We have a term sheet with an investor, which I cannot reveal right now because a few conditions precedents are to be overcome. It will be overcome shortly. And if that happens, another Rs 4,000 crores of equity money will come into the project. With this, we will come down from 100 percent to 51 per cent,” he said.
Subrahmanyan said that the deal proceeds would be used to pare debt to Rs 6,000 crore.
“We can also monetize some real estate, which we’ll do shortly. That will reduce debt to nearly Rs 4000 crore to Rs 5000 crores. We have recently restructured the loan and an interest rate, which was 9.7 percent has been brought down to 6.2 percent. So with this, whatever can be done financially has been done in the project,” he said.
While he declined to name the likely investor, reports suggest it may be National Investment and Infrastructure Fund (NIIF).
“We just have to hope that the offices open, people start going back to office and the project will become cashflow positive and even viable over a period of time. The best that can be done in Hyderabad metro is to move it away from the balance sheet by doing an infrastructure investment fund (InvIT) over a period of time, for which we have in-principal permission from the government. It may take two-three years, but we will do that,” he said.
Deals in the offing
In August 2021, L&T initiated the process to sell its entire 51 percent in L&T IDPL after its other key shareholder, Canada Pension Plan Investment Board (CPPIB), indicated it was unlikely to consolidate its investment in the company. The Canadian pension fund had invested in L&T IDPL in 2014 and increased its stake to around 49 percent, and was expected to buy out the remaining stake from L&T but that did not happen.
“We have a term sheet with a prominent investor. We have our stake down to 51 percent. During the course of the year, we will move IDPL away from our balance sheet. It will no longer be an L&T company. It is work-in-progress and we'll announce it as it happens,” Subrahmanyan said.
The Nabha power plant, which has two units of 700 megawatts each of supercritical thermal power plants at Rajpura in the state of Punjab since 2014 has been on the block for some time too.
“We are talking to an investor and we hope to move the project away from our balance sheet more or less by the end of the year,” the CEO said.
L&T has finalised its next five-year strategic plan, Lakshya’26, which aims at increasing revenue to Rs 2,740 billion by FY26 from Rs 1,360 billion in FY21. This plan aims to divest concessions and sub-scale businesses, focus on infrastructure projects and hi-tech manufacturing and increase the contribution of information technology and services in the company’s overall performance.
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