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L&T explores business trust model for IDPL's road portfolio to raise Rs 2500 crore

MUMBAI: Engineering major Larsen & Toubro is exploring an option to raise between Rs 2000 crore - Rs 2500 crore by clubbing operational road projects of its infrastructure development arm L&T IDPLinto a separate entity which could be listed overseas through a business trust model.


This proposal was separately mooted by a European as well as a Japanese bank to the company, said multiple sources briefed on the matter. This new idea is based on the increasing popularity of the model amongst global financial investors who are scouting for high quality operating yield assets in infrastructure, 
real estate and renewable energy.

L&T explores business trust model for IDPL's road portfolio to raise Rs 2500 crore


Currently L&T IDPL has a portfolio of 18 roads, 10 of which are operational. All the projects are housed under individual special purpose vehicles (SPVs). The total project outlay for the road projects is Rs 21,600 crore. L&T is among the top two road developers in the country. 

Interestingly, the trust proposal has come at a time when L&T IDPL is already in advanced negotiations with a clutch of sovereign wealth funds, pension funds and long only investors to raise up to $500 million by diluting 15-20% at an initial equity valuation in excess of $2 billion. Abu Dhabi-headquartered Mubadala Development Corporation and Khazannah, the investment vehicle of the government of Malaysia and a global pension fund are among the potential suitors. Morgan Stanley has already been advising L&T IDPL in those live negotiations. 

The sources quoted earlier added that the entire matter is still at a preliminary stage and may or may not translate into a dea. "The proposals are still being evaluated and no final decision has been made as yet. It is still preliminary brain storming," said a senior official involved directly in ongoing discussions. 

Sources add that L&T's management would not want to upset the ongoing discussions and are evaluating if an equity investment in the parent platform (L&T IDPL) can co-exist with the
listing of the operational road asset at level below via the trust model. 

"Tapping alternate markets have always been part and parcel of the ideas pool for IDPL. It's not a new or novel idea. Even some Indian companies have tried it in the past. The company's operating team will take a final call on its strategy to find growth capital. We haven't constrained them. Based on their decision, they will come to the board and also to L&T with a concrete proposal...They haven't so far," said R Shankar Raman, CFO, L&T and a director of L&T IDPL. 

Raman felt that both transactions could potentially co-exist. "Infrastructure is a nascent sector, so are the different investment routes. This structure will evolve over time. If the parent's mandate is to identify, develop and commission good projects, then post commissioning you don't have to run them yourself for the next 35 years," he added. 

"Despite the overall slump in infrastructure and considerable macro economic headwinds, the PE transaction at L&T IDPL has progressed considerably even though it's been slow and challenging. Serious negotiations are on with an interested party and a deal should close in the next few months. So this new development has been a surprise to us but will not be at the cost of the other. The management will only proceed if the potential financial investor does not have an objection," said one of the sources mentioned above. 

However when contacted L&T IDPL CEO K Venkatesh said he had no such plans to list the road portfolio separately or create an investment trust. "Bankers keep suggesting ideas. But we are not looking at that option. Our plan is to get private equity and we have reached a stage where some firms have shown a lot of interest and we are going ahead with due diligence." 

As per new plan, a separate trust will be created where all or most of the operational 
roadswill get transferred. This trust then listed overseas and will be traded amongst investors who look for annualised cash flows or yields. The advisors have suggested three markets -- Singapore, Hong Kong and London -- for a potential listing where there is still traction for Indian paper. 

The move is aimed at raising funds for the roads to meet ongoing and future capital requirements and also to trim the existing debt of parent L&T. If the debt from the operating road projects were to be transferred into a separate trust, the strain on L&T's consolidated books will reduce significantly. Being an infrastructure developer, L&T IDPL is a cash guzzler but its debt gets reflected in the parent's books impacting its credit ratings adversely. 

Till 31st March 2013, excluding L&T standalone and L&T Financials, the group had Rs 29,000 crore of debt - a lion's share was on account of L&T IDPL. 

Unlike companies, business trusts aren't required to show profits before distributing available cash funds. As a result, investors can get returns even before profits are generated. This is useful for businesses that generate high cash flows, but see a substantial depreciation of their assets — in this case, capital-intensive highway projects. 

"Forming an investment trust looks like a viable option on paper. But in reality, a company like L&T would require to have ample number of operational projects with toll collection data history to make a move like this. Listing an investment trust overseas entails some degree of forex risk too. Also, in with domestic interest rates being high and uncertainty over GDP growth, it may be challenging to get very good valuations," warned Nitin Bhasin, analyst,
Ambit Capital. 

Beyond roads, L&T IDPL's portfolio of 27 infrastructure assets includes three ports and a metro rail project. Out of that, Rs 16,400-crore Hyderabad Metro project is one of the most ambitious BOT (build operate and transfer) asset. 

The company has also partnered with Tata Steel for an equal venture for the Rs 3,000-crore Dhamra Port, with a debt equity of 2:1. As on March 2013, the total project cost of all the SPVs put together is a whopping Rs 65,600 crore. While the equity is Rs 5500 crore, the residual equity commitment of Rs 8700 crore is yet to flow in. The debt in the projects stood at Rs 51,400 crore.