The sale of L&T IDPL does not have the ability to move the needle

Capital commodities and engineering firm Larsen & Toubro Ltd (L&T) is discussing divestment of non-core assets. L&T and the Canada Pension Plan Investments (CPP Investments) have sold 100% of their shares in L&T Infrastructure Development Projects (L&T IDPL) for an enterprise value of $6,000 cores.

L&T has been talking about monetizing non-core assets for quite some time. “So in that sense, selling shares of L&T IDPL is a step in the right direction and is emotionally positive,” said Parikshit Kandpal, vice president of institutional research at HDFC Securities Ltd.

In L&T IDPL, L&T and CPP Investments hold 51% and 49% shares, respectively. The total proceeds from the sale will be approximately $2,723.4 crore before closing adjustments and other terms of the transaction. L&T is likely to get around $1,390 cores.

The deal makes L&T asset-light by cutting its exposure to its non-core asset-heavy product portfolio. It is also expected to improve earnings per share (EPS), though not by much. According to estimates by Jefferies India, EPS in 2024-25 of L&T may increase by 1.5-2%. Overall, however, this sale is relatively smaller and unlikely to affect L&T cash flow. In addition, analysts at Jefferies note that L&T IDPL is reflected as a joint venture investment for L&T, so there will be no write-offs to the consolidated balance sheet from the sale. this. Remember, investments in a wide range of non-core assets are weak points for L&T investors. In addition to L&T IDPL, L&T also contacted Nabha Power Ltd. and the Hyderabad Metro railway project.

L&T stock has recovered well in the past 6 months

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L&T stock has recovered well in the past 6 months

“L&T investors are waiting for the right capital allocation strategy to be implemented, and the IDPL deal opens the door to that. However, in terms of operations, things may not change much for L&T,” said Amit Anwani, research analyst at Prabhudas Lilladher, for earnings to improve meaningfully and debt to fall. reduced, it is necessary to restructure the Hyderabad Metro railway project and sell Nabha Power, he added.

During its post-Q9 earnings call (Q2FY23), L&T management said the loss in Hyderabad Metro has steadily narrowed during the quarter. Second, average metro passenger volume improved to 355,000 in Q2 from 2,85,000 in Q1. Management expects that passenger volume will increase to 5,00,000-6,00,000 in 12-18 next month. L&T management aims to reduce Hyderabad Metro’s debt from $13,000 crore to $7,000-8,000 crore in the next two years.

According to Anwani, one of the factors driving the share price up is the improved passenger volume of the Hyderabad Metro project, only then can the company consider monetizing the project. “If sold, L&T will be able to strengthen its balance sheet and also invest in more suitable/appropriate projects,” he added.

Management said that for Nabha Power, various divestment options are being explored, but nothing has materialized so far.

L&T’s upbeat domestic and Middle East outlook is supported by strong order flows. This is reflected in the stock price, which is hitting a 52-week high of $2,211.60 per person seen on the NSE on Dec. 16. So far in CY22, L&T stock is up 15%, beating the 6% return of the benchmark Nifty 50 index.

In addition to divesting non-core assets, further improving margins from the core business is also seen as a bullish leverage for the stock.

On the other hand, a slowdown in government infrastructure spending could be a potential risk to L&T. After all, the company is seen as the focal point for India’s infrastructure story.

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