• L&T in talks with Canadian pension fund to sell road projects

    Larsen and Toubro Ltd (L&T), the country’s largest engineering and construction firm, plans to monetize its operational road projects, held by subsidiary L&T Infrastructure Development Projects Ltd (L&T IDPL), in a deal with Canada Pension Plan Investment Board (CPPIB), according to three people with direct knowledge of the discussions between the two companies.

    A deal will be struck within six months, the three added, asking not to be identified.

    L&T is discussing with CPPIB the possibility of creating two road companies, one to develop new roads and the other to operate all the existing roads assets, group executive chairman A.M. Naik said in an interview on Friday. He did not disclose further details.

    A deal hasn’t been struck, said a senior L&T executive.

    “Nothing has been concluded (with CPPIB). Monetization of assets is a part of the plan, but in what form, we have not decided. Monetization will help IDPL focus on its next projects, which will require recycling of capital. So you can’t have capital stuck in commissioned projects,” said R. Shankar Raman, chief financial officer of L&T and non-executive chairman of L&T IDPL.

    A CPPIB spokesman declined comment for the story.

    As of 31 March, CPPIB had C$278.9 billion (around Rs.14.3 trillion today) in funds under management.

    The deal, when it happens, will be one of the biggest in the roads sector and give CPPIB a significant presence in India’s roads sector. It will also help L&T return to bidding for BOT (build, operate and transfer) road projects.

    CPPIB, the largest pension fund in Canada, has already invested Rs.2,000 crore in L&T IDPL in two tranches. The first tranche was invested in December 2014, marking the entry of CPPIB into India’s infrastructure sector. L&T got the second tranche of Rs.1,000 crore a year later.

    L&T and CPPIB are discussing different options—whether the pension fund will buy the entire portfolio of operational assets or a few individual assets—and working on a structure to carve out the road assets from L&T IDPL, which also houses the Hyderabad Metro project, the three people said.

    L&T IDPL owns and operates roads, bridges, the Hyderabad Metro project and the Kudgi Power Transmission Line. Out of its 17 road projects, 13-14 are operational. The firm has been vocal about its plans to eventually monetize its operational road assets to free up capital by way of a sale or an infrastructure investment trust (InvIT).

    In recent years, L&T has been hit by stalled industrial projects and a downtrend in the investment cycle. The company has only been bidding for road projects under the government- funded EPC model (engineering, procurement and construction) and kept away from bidding for BOT projects, under which a developer builds the project with its own money and earns annuity over the period of concession. Once it is able to monetize assets, L&T plans to start bidding for projects under BOT and the new hybrid annuity model to benefit from the government’s emphasis on roads, said one of the three people cited above.

    “L&T is working on a structure to transfer the operational road projects to the pension fund, while it will continue to hold a minority stake in the carved out portfolio. L&T cannot put more capital in the roads sector unless it monetizes existing projects,” this person said.

    L&T’s roads business has an estimated loss of Rs.600 crore. The firm has built around 7,800km of roads at a total project cost of around Rs.18,000 crore of which Rs.12,000 crore is debt.

    The L&T group, with its 82 business units, runs under a complex structure and is trying to simplify itself by divesting or monetizing non-core assets. L&T is trying to simplify its business structure and right-size capital allocation by sticking to core businesses, said Axis Capital in a report on 7 July. “The company will exit all non-core businesses (insurance, Kattupalli port, Rajpura power plant) over 1-2 years,” the report said.

    L&T, which builds and operates roads, ports and other infrastructure projects, has also evaluated listing some of its operational road assets through InvIT, a new structure cleared by capital market regulator Securities and Exchange Board of India (Sebi) to ease access to funds for infrastructure developers. But the company is more inclined towards an outright sale, the second of the three people cited above said.

    Sebi is yet to remove “some of the constraints” in InvITs, Raman said. “There is acknowledgement of the constraints, but a formal withdrawal of restrictions has not yet happened.”

    CPPIB has invested more than $2 billion (around Rs.13,400 crore today) in India and that is likely to go up, the fund’s top management said during a visit to India in October.

    In India, CPPIB also has a strategic alliance with Shapoorji Pallonji Group, called SPREP Pte Ltd, and a real estate investment platform alliance with Piramal Enterprises Ltd, where both partners have committed $250 million each.

    Other large Canadian pension funds Caisse de dépôt et placement du Québec and the Public Sector Pension Investment Board are also looking to invest in the Indian infrastructure sector. Landon Collins Jersey

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