JOIN USNMP: Do India’s infra biggies want those assets?
A disclaimer before I begin: I was with Larsen & Toubro (L&T) for 32 years and continue to be a shareholder today. Till recently, L&T’s tagline read “We make the things that make India proud”. While operating in nine different segments — infrastructure, heavy engineering, power, defence, hydrocarbons, Information Technology (L&T Infotech, L&T Technology Services and Mindtree, which was acquired in 2019, are separately listed), financial services, developmental projects, and a miscellaneous group called ‘others’, infrastructure was always the key growth driver, constituting a major portion of its order book.
The general public, too, identified the L&T brand with infrastructure because they saw the world’s tallest ‘Statue of Unity’, a tribute to Sardar Vallabhbhai Patel, and several other marquee projects spread across the country teeming with L&T workmen in orange work vests, proudly inscribed with the L&T logo in black.
Why then is L&T moving out of infrastructure asset ownership?
After hiving off its 99 MW hydropower plant to ReNew Power, its Seawoods Grand Central Mall to the Blackstone Group LLP, planning divestment of its stake in L&T Infrastructure Development Projects Limited, which currently owns and operates highways and transmission line assets, why the effort to divest the 1400 MW Nabha Project and the Hyderabad Metro Rail Project, L&T’s single largest project investment, too? Why this strategy to bring in an asset-light balance sheet?
The potential for infrastructure growth in India is vast. Pivotal for accelerated economic development, infrastructure is essential for India to achieve its potential economic growth trajectory. Infrastructure results in increased employment opportunities, access to markets and materials, and improved quality of life. The government has correctly identified “Monetisation of Assets” as a key pillar, drawing up a National Monetisation Pipeline (NMP) to raise Rs 6 lakh crore by 2025 by selling a host of publicly-owned assets.
Except that L&T, seen as the barometer of infrastructure play, is itself trying to become asset-light, not wanting to lock its capital up in long-term infrastructure, instead determined to rid itself of its own assets, the Nabha Power Project and the Hyderabad Metro Rail, to become reduce debt.
An inkling of L&T’s predicament can be realised by looking at other Indian companies in the infrastructure space. Hindustan Construction Company declared a net loss of Rs 566 crore in FY2021 and a loss of 202 crore for the first half of FY22. Similarly, JP Associates declared a net loss of Rs 271 crore in FY21 and a loss of 420 crore for the first half of FY22. GMR Infrastructure Limited declared a net loss of Rs 3,427 crore in FY21 and a loss of Rs 487 crore for the first half of FY22. GVK, Gammon, Punj Lloyd face a tough and uncertain future.
These FY22 half-yearly figures do not at all augur well for Niti Aayog’s National Monetisation Pipeline, especially when private sector asset acquirers in the past have faced wrong traffic assumptions, have had power purchase agreements for power plant assets forcibly negotiated, and even had judicial orders going against them.
L&T’s FY21 Annual Report shows an emphatic shift of profit before interest and tax from infrastructure to the IT space. While its FY20 infrastructure profit fell from 32% to 31%, the profit for IT and technology services rose from 23% to 34%. Continuing this trend, L&T’s stand-alone and consolidated segment results for the first half of FY22 again show that while infrastructure profit fell from 31% to 24%, the IT and technology services profit continued its rise, this time from 34% to 45%. A company that has for long been the byword for infrastructure in India is gradually getting stronger in IT, and at this rate, its future is going to look a lot different!
Though L&T has not stopped highlighting infrastructure as a key segment for it, with the IT subsidiaries contributing a substantial chunk to its margins, the nature of the firm is bound to be dissimilar to its past. To boot, L&T has announced a foray into EdTech, with an e-learning platform that would help it cash in on the online education revolution in the country. The practical-oriented hybrid online learning platform will create industry-ready talent while adding further heft to L&T’s IT segment margins.
For the shareholder, this tilt toward the IT ecosystem is a win-win, the L&T stock will continue to be a good bet. But the government, looking to offload its infrastructure assets to the private sector, should find this trend worrisome, perhaps requiring a return to the drawing board to take a re-look at its National Monetisation Pipeline plans.
(The writer is a former
Executive Director and Member, Board of Directors, BEML)