Mumbai: The Canada Pension Plan Investment Board (CPPIB), which manages C$219 billion of assets, has agreed to invest ₹ 2,000 crore in L&T Infrastructure Development Projects Ltd, an unlisted subsidiary of India’s largest engineering and construction company Larsen and Toubro Ltd (L&T).
The investment, to be made in two instalments, will be routed through CPP Investment Board Singaporean Holding 1 (CPPIBSH), a subsidiary of CPPIB.
The investment board will buy preference shares of L&T Infrastructure, compulsorily convertible into equity shares by 2018 at a mutually agreed price. After the conversion, CPPIBSH will hold a minority stake in L&T Infrastructure.
After the initial investment of ₹ 1,000 crore, the second instalment—of a similar amount or more—will follow after 12 months, as per mutual agreement and subject to regulatory approvals.
The deal comes at a time when India’s new government is trying to unlock stalled infrastructure projects including power plants and roads, and attract new investments to revive economic growth that slumped to less than 5% in each of the previous two years.
This is the first direct private investment by a Canadian pension fund in an Indian infrastructure development company, L&T said in a statement.
“We are pleased to form this new partnership with CPPIB. With its long-term view, CPPIB would be an ideal partner for L&T and will provide growth capital to L&T IDPL (L&T Infrastructure) to expand its infrastructure development business," said R. Shankar Raman, chief financial officer and a member of the L&T board.
According to André Bourbonnais, senior vice-president, private investments, CPPIB, this is CPPIB’s first investment in India’s infrastructure sector “with a highly reputable partner" and fits well with his company’s strategy for India as a key long-term growth market.
CPPIB is a professional investment management organization that invests the assets of the Canada Pension Plan that are not immediately needed to pay pension, disability and survivor benefits.
L&T Infrastructure’s business includes development of roads and bridges, ports, metro rail, power transmission lines, wind energy and emerging sectors such as water and railways. It handles infrastructure assets with an estimated project cost of $7.5 billion comprising 23 projects across sectors.
“The completion of the transaction and receipt of funds is subject to fulfilment of customary closing conditions for transactions of this nature and procuring necessary approvals from relevant government authorities and regulators," L&T said in a statement.
The deal is a part of L&T’s strategy of adopting an “asset-light strategy" by separating business units into independent subsidiaries with the intention of eventually selling a stake in these businesses. The company is looking to divest assets as a way to generate capital for investing in fresh projects.
To be sure, monetizing existing businesses is only one part of the conglomerate’s strategy to weather the economic downturn. L&T, which is considered a corporate proxy for the broader economy, is also expanding into newer markets overseas and newer sectors and is bidding for smaller projects.
In May, L&T Infrastructure along with Tata Steel Ltd sold a 100% stake in Dhamra Port Co. Ltd at an enterprise value of ₹ 5,500 crore. L&T Infrastructure held a 50% stake in Dhamra Port.
L&T is looking at tapping the markets two years from now. Two of its subsidiaries, L&T Infotech Ltd and L&T Technology Services, will start the process for initial public offerings (IPO) starting in July 2016.
In a 31 May note to investors, Motilal Oswal Securities Ltd said L&T’s management intends to improve consolidated return on equity to 20% in the current financial year (15.5% in fiscal 2012-13) and return on capital employed to 15% (10% in fiscal 2012-13).
“Capping investments in concession business and asset monetization are important parts of this strategy," Motilal Oswal said in the note.
CPPIB is no stranger to India.
In February, Piramal Enterprises Ltd, the pharma-to-financial services group, signed a strategic alliance with CPPIB Credit Investments Inc., a wholly owned subsidiary of CPPIB, for a $500 million realty debt fund.
CPPIB and Piramal will initially put $250 million each in the debt fund and it will be managed by Indiareit Fund Advisors Pvt. Ltd, the real estate private equity arm of Piramal Enterprises. The fund will provide rupee debt financing to residential projects across India’s major urban centres.