Larsen Plans India’s First Inflation-Linked Bonds by a Company

Larsen & Toubro Ltd., India’s biggest engineering company, plans to sell the nation’s first corporate inflation-linked bonds to lure investors in a country where price increases have averaged 7.2 percent in the past year.

Larsen & Toubro, based in Mumbai, will raise 1 billion rupees ($18.2 million) selling 10-year notes, according to a person familiar with the matter. The bonds will offer a yield of 165 basis points higher than the inflation rate based on monthly wholesale prices, the person said asking not to be identified because the terms aren’t set.

The builder of roads, airports and homes joins the government in planning to sell similar securities. Prime Minister Manmohan Singh’s administration will offer as much as 150 billion rupees of the notes starting June, according to a Finance Ministry statement. The inflation rate, which was at 10 percent in September 2011, last month increased at the slowest pace since November 2009.

“There is still uncertainty on inflation,” Mahendra Jajoo, Mumbai-based chief investment officer at Pramerica Asset Management Pvt., said in a phone interview today. “If an investor’s objective is to hedge against inflation, such an instruments serves that purpose.”

Yields on Larsen’s 11.45 percent rupee-denominated notes maturing December 2018 fell one basis point to 8.49 percent today, according to data compiled by Bloomberg. The company’s shares rose 3.9 percent to 1,580.55 rupees as the benchmark stock index rose to the highest in more than two years.

The last inflation-linked debt sale in India was in 1997, when the government raised 7.05 billion rupees selling 6 percent notes. That bond matured in 2002, the data show.

IDFC Ltd. helped Larsen sell the bonds, the person said. Larsen & Toubro’s notes will limit the inflation range to 12 percent and 3 percent, the person said. The company’s Chief Financial Officer R. Shankar Raman wasn’t available for a comment on the bond sale.

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