New Delhi: Larsen and Toubro Ltd (L&T), India’s biggest engineering firm, may borrow as much as $4.4 billion (Rs20,100) to build a power generation business and is considering buying coal mines in Australia and Indonesia to gain fuel supplies.
L&T’s utility unit may use debt to finance 80% of the Rs25,000 crore needed to build 5,000MW of thermal power capacity, Ravi Uppal, managing director and chief executive officer of L&T Power, said over phone from Mumbai on 15 January, without giving details of the funding plan.
Increased debt could prompt a cut in L&T’s credit rating after Moody’s Investors Service lowered its outlook on the Baa2 ranking to negative in August on concern about increased borrowings. The government is encouraging companies to invest as much as Rs569.6 billion in power generation to end shortages in the world’s second fastest growing major economy.
“Our credit rating on L&T reflected our concern about their credit ratio weakening because their expansion plans in infrastrucure and finance are more aggressive than we thought,” said Ivan Palacios, Singapore-based analyst at Moody’s by telephone on Monday. The company shouldn’t have a problem raising funds, he said. Palacios reaffirmed the Baa2 rating, its second lowest investment grade ranking, and outlook.
Power generation companies in India plan to almost double capacity in the five years to March 2012. Prime Minister Manmohan Singh has pledged to build plants and transmission lines to cut peak-hour shortages as high as 12.6% this year, according to the Central Electricity Authority.
“We want to support India’s power industry,” said Uppal. “Our engineering and construction capability can get going a major power scheme.” The plan is part of a changing profile of L&T, he said.
L&T Power is also looking to acquire coalmines in Indonesia and Australia, apart from fields in India, to fuel the mostly coal-fired capacity, Uppal said without giving details.
In August Moody’s revised L&T’s outlook to reflect the increase in the company’s consolidated debt, which is higher than its previous expectations as a result of the company’s rapid growth plans. This increase in debt is evident at L&T’s stand-alone level—because of its large capital expansion programme—as well as at its infrastructure development and finance subsidiaries, Palacios, Moody’s lead analyst for the engineering company, said in the report.
Moody’s kept its rating unchanged in October after L&T sold convertible bonds worth $600 million.
The parent firm, which builds power plants on contract is looking to diversify into generation after it acquired the expertise to manufacture large boilers and turbines through a joint venture with Mitsubishi Heavy Industries Ltd, Uppal said. The venture at Surat in western India is scheduled to begin producing boilers by April and turbines in June.
“With our joint venture with Mitsubishi we will become a mega manufacturing unit for boilers and turbines,” Uppal said. The unit, which will compete with Korean and Chinese suppliers, can produce 4,000MW of equipments a year, he said.
L&T Power plans to use so-called supercritical technology to build its projects to cut sulfur and nitrogen oxide emissions, he said.
L&T may consider listing its power unit on Indian exchanges to help raise funds in the future, according to Uppal. The parent’s shares have more than doubled since last year compared with a 94% rise in Sensex.
The company has begun work on a 1,320MW coal-fired plant at Rajapura in Punjab. The company may complete raising loans for the project very shortly, Uppal said without giving details.
The project’s first phase of 660MW will begin generation by the end of 2013, he said. The company is scouting for locations to build more projects and will bid to build large power projects capable of producing as much as 4,000MW being auctioned by the Indian government, Uppal said.
The government plans to auction a total of nine such projects, each of which can meet the electricity needs of 1 million middle-income Indian homes. Four have already been auctioned.