L&T Said to Plan Biggest Road IPO in Singapore: Corporate India

Larsen & Toubro Ltd., India’s largest engineering company, is considering a Singapore listing for its toll-road projects that could raise about $700 million, said two people with knowledge of the process.

Larsen may sell units in a business trust backed by assets from L&T Infrastructure Development Projects Ltd.’s road network next year, said one of the people, who asked not to be identified as the details are private. The company runs 13 expressways and has five more under construction, Morgan Stanley analyst Akshay Soni said in a report yesterday.

The proceeds will help Larsen’s unit, which is also developing a metro rail project, raise equity without seeking funds from the parent whose debt jumped 31 percent in the year ended March 31. The sale, the biggest initial public offering in Singapore by an expressway operator, will help Mumbai-based Larsen conserve cash amid the slowest pace of economic growth in India in a decade and rising borrowing costs.

Larsen is “choosing not to fund the company as they don’t want their balance sheet to go for a toss,” said Nitin Bhasin, an analyst with Ambit Capital Pvt. in Mumbai. External funding will help Larsen improve its return on equity, he said.

IDPL forecasts it will need 82 billion rupees ($1.3 billion) of equity funding in the five years to 2018, Morgan Stanley’s Soni wrote in the report. Securitization such as the one planned in Singapore will help the company raise 60 percent of the funds, according to Soni.

Debt Surge

Larsen’s total group debt surged to 624.6 billion rupees in the year ended March 31 from 476 billion rupees a year earlier, according to data compiled by Bloomberg. The company reported sales of 745 billion rupees, while interest expense almost doubled in the period, data show.

The company’s shares, which have dropped 22 percent this year, rose 0.6 percent to 831.35 rupees in Mumbai. The benchmark S&P BSE Sensex index fell 0.3 percent.

Larsen is working with Nomura Holdings Inc. and Standard Chartered Plc to help with the IPO, the people said.

“We are evaluating various options for our capital raising exercise,” R. Shankar Raman, chief financial officer for Larsen & Toubro, said in a phone interview yesterday, adding that it was premature to comment on the company’s Singapore listing plan. “We’ll have to see where there is a pool of investors and sufficient capital that can be tapped.”

Indian IPOs

Indian companies including Infrastructure Leasing & Financial Services Ltd. and Mytrah Energy Ltd. are planning to sell shares in Singapore as initial public offerings in India plunge. Religare Health Trust, backed by the assets of India’s second-biggest hospital company, Fortis Healthcare Ltd., raised S$511 million ($407.9 million) in Singapore in October.

IPOs in India have raised 14.7 billion rupees so far this year, compared with 62.28 billion in all of 2012, according to data compiled by Bloomberg.

The volatility in the rupee may affect the timing of the issue, one of the people said. The currency’s 12 percent fall this year and change in regulations in India may deter investors from Larsen’s offering, said Alan Richardson, a Hong Kong-based money manager at Samsung Asset Management, which oversees more than $100 billion globally.

“Investors who buy into trusts or REITs look for secure or consistent cash flows,” said Richardson. Investors don’t find it comforting to see “volatility especially if the aim is to have a consistent stream of dividends. The companies would have to offer a significantly higher dividend yield to attract investors -- 8 percent or 9 percent would be what investors would be expecting from these kind of Indian REITs.”

Behind Target

Larsen would look to reduce its stake in IDPL as the unit is known, Raman said in May. The road portfolio of the company is valued at 220 billion rupees, according to the company website. Traffic on toll roads fell short of its target last year, according to Morgan Stanley’s Soni.

Larsen, founded by two Danish engineers in 1938, is working toward raising its return on equity to 20 percent by 2017 by reining in debt, boosting revenue and cutting stakes in some units, Raman said in an interview in May. The measure fell to 16.5 percent in the year ended March 31, the lowest reading in a decade, data compiled by Bloomberg show.

Asia’s second-largest engineering and construction firm by market value is also trying to reduce its stake in IDPL to 80 percent from 98 percent, Raman said this year. Private equity fund Old Lane LP owns 2 percent on the unit.

IDPL is building the 141.3 billion-rupee mass transit railway in Hyderabad and owns half of Dhamra Port Co. in the eastern state of Odisha, according to its website.

“Monetization is key to strategy,” said Morgan Stanley’s Soni. “L&T management is of the view that further growth at IDPL should preferably come through internal generation, or through asset divestment.”

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