L&T looks at divesting assets to generate capital for fresh projects3 min read . Updated: 30 Jan 2014, 12:27 AM IST
The firm is also expanding into newer sectors, overseas markets and bidding for smaller projects
Mumbai: India’s largest engineering and construction company Larsen and Toubro Ltd (L&T) is 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, which is considered a corporate proxy for the broader economy, is looking to divest assets as a way to generate capital for investing in fresh projects.
“We are in the process of ‘asset lightening’," said K. Venkataramanan, chief executive officer and managing director.
To be sure, monetizing existing businesses is only one part of the conglomerate’s strategy to weather the economic downturn. L&T is also expanding into newer markets overseas and newer sectors and is bidding for smaller projects.
But like most other Indian infrastructure companies, L&T is also feeling the need to shed assets. In the near term, projects in the real estate, roads and ports segments may be put up for outright sale or partial divestment.
Additionally, L&T Infrastructure Development Projects Ltd (L&T IDPL), a unit of L&T, has submitted an application to the Foreign Investment Promotion Board (FIPB) seeking approval for a proposed foreign direct investment in the company. The company is expecting a total infusion of ₹ 2,000 crore in two tranches.
In November, L&T said it was considering an initial public offering (IPO) for the IDPL unit in Singapore. A listing of some road assets through a business trust in Singapore is also on the agenda.
The company says it will offload assets at appropriate valuations. R. Shankar Raman, chief financial officer at L&T, said the company is in no rush to sell assets, but is seeking to generate growth capital from these infrastructure assets.
In the ports sector, L&T is close to selling its holding in the Dhamra Port in Odisha. Adani Ports and Special Economic Zone Ltd (APSEZ), which is set to buy Dhamra Port Co. Ltd for ₹ 5,000 crore, has been appointed as a management consultant to Dhamra Port, an equal joint venture between L&T and Tata Steel Ltd.
The strategy to divest existing assets is one that L&T has used in the past as well. In December 2009, it sold its 17% stake in Bangalore International Airport Ltd (Bial) to GVK Power and Infrastructure Ltd (GVKPIL) for ₹ 686 crore.
“Over the years they have made better returns from divestitures, for example when they sold the Bangalore airport stake to GVK, they fetched a good premium to investment," said Nitin Bhasin, an industrials infrastructure, cement and E&C analyst at Ambit Capital Pvt. Ltd.
Other infrastructure companies such as GMR Group have also gone down the same path. In 2012, chairman G.M. Rao said GMR Group was executing an “asset light, asset right" strategy with the theme of “develop, build, create value, divest and reinvest". Subsequently, the group sold a number of its power, road and airport projects.
L&T has also started the process of separating business segments into independent subsidiaries, a process that will help the company raise capital eventually. Most recently, it separated the hydrocarbons business by forming an independent subsidiary, L&T Hydrocarbon Engineering Ltd.
The creation of independent subsidiaries gives L&T the option of listing them in the future, like it did with its finance subsidiary, L&T Finance Ltd. The management has not set any specific timeline for listing.
L&T Electricals and Automation, L&T IDPL, Dhamra Port, and L&T Shipbuilding Ltd. are some of the other units that have been previously hived off into subsidiaries.
By separating these businesses, L&T is turning itself into a purely civil engineering and infrastructure business, according to Ambit’s Bhasin, “This will help them in the future. Since the scale of each of L&T’s businesses is moving in different directions they would be able to focus on each business efficiently," he added.
Besides selling assets and carving out subsidiaries, L&T has also started to aggressively bid for smaller projects in India and abroad to drive growth.
Although international orders are shrinking L&T’s margins, the company continues to chase them. Chasing more international orders is plan B, while the company waits for a turnaround in the domestic market, said Raman of L&T.
The company is targeting incremental orders of over ₹ 1 trillion in the next 3-4 years, with the largest chunk coming from transportation and infrastructure. As on 31 December 2013, L&T’s order book stood at ₹ 1.71 trillion.
Shares of L&T have dropped 6.58% over the past 12 months while the benchmark Sensex rose 3.28%. The BSE Capital Goods Index fell 10.98% in the same period. L&T shares closed at ₹ 993.15 on the BSE on Wednesday, up 0.89% from previous close, while the benchmark Sensex fell 0.18% to 20,647.30 points.