The return on equity at Larsen & Toubro (L&T) should climb in the next three years as India’s biggest infrastructure company exits non-core businesses, and enhances the financial performance at a northern power plant for which it has just secured a commercially favourable ruling.
The Supreme Court’s decision to include coal-washing costs in the tariff computation for the output from Nabha Power Limited (NPL), a 100 per cent L&T subsidiary , should be one of the triggers for superior RoE. Analysts are penciling in RoE of about 18 per cent by 2020 from 12.8 per cent in FY17 for the company that will likely get a better valuation for NPL if it decided to divest its holding.
Even if the plant is not sold, L&T may be able to monetise the NPL investments through the InvIT route. Based on the FY16 book value, the Street has assigned Rs 15-22 per share for NPL, using the Sum-of-the-Parts methodology to calculate L&T’s enterprise value.
NPL is a thermal plant of 1,400 MW in Punjab and owned by L&T through a special purpose vehicle.The case was between NPL and Punjab State Power Corporation PSPCL) on including the coal washng and transportation costs while omputing tariffs.PSPCL argued that only a fraction f the costs should be included in the ower Purchase Agreement (PPA) s washed coal was mandatorily to e used for power generation. The &T view was that the PPA menions only washing coal, and the washing charges of about Rs 350 crore a year must be factored in while computing the tariff.
The inclusion of coal washing charges will benefit NPL for the remaining 22 years of operations, translating into about Rs 7,000-8,000 crore over the remaining term of the PPA. NPL is among such businesses as shipbuilding, special steel and forging, and road SPVs to hit L&T’s profits and reducing RoE by about 260 basis points in FY17.
With the favourable ruling, NPL could post a profit in the current fiscal. NPL had incurred a loss of Rs 28.2 crore in FY17. Besides, profitability may rise by the write-back of Rs 140 crore from expected credit loss (ECL), which the company had provisioned last year, and though about Rs 200 crore in unrecognised revenues in the second quarter of FY18.Furthermore, the mandated refund of Rs 1,100 crore should help L&T repay loans. Read more
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