Last week, the financial services unit of Larsen and Toubro Ltd (L&T) offloaded a small portion of its stake in a listed firm—Kalindee Rail Nirman (Engineers) Ltd. The open market sale brings down L&T’s stake to around 11.8% from 14.7% that it held for nearly two years.
What might have prompted this? And will L&T exit Kalindee Rail completely? Stake sales typically happen when equity market sentiment is buoyant, which ensures a good exit price for the investor. Sometimes it happens when the investment isn’t paying off, or sometimes even when the objectives have been achieved. In 2008, L&T Capital Co. Ltd, strategically invested in Kalindee—this was to aid L&T’s venture into railway infrastructure equipment, telecommunications network and gauge conversion projects. Some analysts say Kalindee’s expertise in railway signalling systems and telecom networks along with gauge conversion execution skills had even made it a potential acquisition target. But from then to now, L&T has wrapped up a sizable order book in the segment, with monorail and metro rail projects. The stake, therefore, seems more a financial investment in a business, where L&T can now scale up. Perhaps, it could fare better than its peers too, especially in EPC projects. Kalindee’s performance has not been great in recent times. In the June quarter, it posted a Rs51.8 crore profit on Rs3.1 crore revenue. But between fiscal 2008 and 2010, the firm’s compounded annual growth rate (CAGR) in revenue was 12.9%, and 27.2% in net profit. Even peers such as Stone India Ltd registered a mere 5% CAGR in revenue, and 21.4% in net profit. Unlike roads and power, which saw a quick ramp up, the railways equipment space is chugging, though there could be better growth prospects ahead.
Graphic: Naveen Kumar Saini/Mint
Given that it’s not worthwhile holding or increasing the stake, L&T has timed its sale of shares well, as equity markets are surging. Kalindee shares have posted negative returns as its shares fell from Rs289 in April 2008 to Rs166. L&T shares, on the other hand, viewed to be the largest play on India’s infrastructure growth, have returned 37% over the period.
Analysts reckon that the firm is taking a re-look at most of its investments. Earlier this month, the media reported a part-sale of its holding in Mahindra Satyam. Last year, it had sold its stake in Ultratech Cement Ltd. The focus on engineering, procurement and construction seems prudent going ahead, given its huge order book of around Rs1.07 trillion as of end-June. L&T will perhaps divest its entire 11.8% stake in Kalindee too, though a timeline is not known.
On the eve of the September quarter results (to be announced on Monday), L&T shares changed hands at around Rs1,989 apiece. Analysts estimate a 12-14% year-on-year growth for the quarter in net sales and profit. Given expectations of 22-23% annual growth in earnings until fiscal 2012, the stock trades at fair valuations—with a price-earnings multiple of around 21.