Why L&T IDPL sale is not enough


Engineering and capital goods company Larsen & Toubro Ltd (L&T) is walking the talk on divestment of non-core assets. L&T and Canada Pension Plan Investment Board (CPP Investments) have sold their 100% shareholding in L&T Infrastructure Development Projects (L&T IDPL) for an enterprise value of 6,000 crore.

L&T has been talking about non-core asset monetization from quite some time. “So, in that sense, the stake sale in L&T IDPL is a step in the right direction and sentimentally positive,” said Parikshit Kandpal, vice president of institutional research, HDFC Securities Ltd.

In L&T IDPL, L&T and CPP Investments hold 51% and 49% stake, respectively. Gross proceeds from the sale would be around 2,723.4 crore before closing adjustments and other terms of the transaction. L&T is likely to garner around 1,390 crore.

The deal helps L&T become asset-light by cutting exposure to its non-core asset-heavy product portfolio. It is also expected to improve its earnings per share (EPS) outlook, albeit not much. According to Jefferies India’s estimates, L&T’s FY24-25 EPS could see 1.5-2% accretion. However, overall, this stake sale is relatively smaller and is unlikely to move the needle for L&T on cash flows. Also, analysts at Jefferies note that L&T IDPL is reflected as a joint venture investment for L&T, so there will be no debt reduction for the consolidated balance sheet from this sale. Remember, investments in a slew of non-core assets have been sour points for L&T investors. Apart from L&T IDPL, L&T also has exposure to Nabha Power Ltd. and Hyderabad Metro rail project.

L&T shares have staged a good recovery in the past six months

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L&T shares have staged a good recovery in the past six months

“L&T investors await the playing-out of the right capital allocation strategy and the IDPL deal opens the door for that. However, on the operational front, things may not change drastically for L&T,” said Amit Anwani, research analyst at Prabhudas Lilladher. For earnings to meaningfully improve and debt to ease, Hyderabad Metro rail project restructuring and Nabha Power sale is needed, he added.

In the post September quarter (Q2FY23) earnings call, the L&T management said that the loss in the Hyderabad Metro had narrowed down sequentially during the quarter. Secondly, the average metro ridership improved to 3,55,000 in Q2 from 2,85,000 in Q1. The management is hopeful that ridership would increase to 5,00,000-6,00,000 over next 12-18 months. The L&T management aims to bring down Hyderabad Metro debt from 13,000 crore to 7,000-8,000 crore over the next two years.

According to Anwani, one of the upside triggers for the stock is improvement in ridership of the Hyderabad Metro project, only then can the company look at monetizing it. “If that sells, L&T will be able to strengthen its balance sheet and also invest in more suitable/relevant projects,” he added.

As far as the Nabha Power is concerned, various divestment options are being explored, but nothing has materialized so far, said the management.

L&T’s domestic and Middle East prospects are upbeat supported by robust order inflows. This reflects in the share price, which is flirting with the 52-week high of 2,211.60 apiece seen on NSE on 16 December. So far in CY22, the L&T stock has risen 15%, beating benchmark index Nifty 50’s 6% returns.

Apart from divestment of non-core assets, a further improvement in the core business margin, is also seen as an upside lever for the stock.

On the flipside, a slowdown in government’s infrastructure spending could be a potential downside risk for L&T. After all, the company is considered as a bellwether for India’s infrastructure story.

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