May 2, 2018 / 8:46 AM / a year ago

BREAKINGVIEWS-India's top builder starts useful renovation

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Una Galani

MUMBAI, May 2 (Reuters Breakingviews) - India’s top builder is undergoing a welcome renovation. Construction and engineering titan Larsen & Toubro agreed to sell its electrical and automation unit to France’s Schneider Electric for $2.1 billion in cash. The deal reduces the sprawl of the $30 billion group. To meet its ambitious targets could require more remodelling.

The French buyer aims to ride Prime Minister Narendra Modi’s various initiatives for more affordable housing and wiring up the country. Schneider will merge the L&T business with its own similarly focused unit, and Singapore’s Temasek is investing about $760 million for a 35 percent stake in the enlarged enterprise. India will become the company’s fourth largest market.

Schneider is paying for the privilege, though. The transaction values the L&T unit at 15 times expected EBITDA after some adjustments. Factoring in the anticipated financial benefits of combining the two companies, Schneider reckons that multiple will drop to 11 times. That’s closer to the buyer’s own valuation, but remains rich given the unit’s slow growth. L&T, by contrast, fetches a valuation of about 17 times EBITDA.

For the Indian company, the sale is the first significant disposal under Chief Executive S.N. Subrahmanyan, who took over last July, and signals the start of an era where L&T focuses on higher growth and volume businesses. It is unclear, though, how neatly the deal fits with ambitious targets to double revenue and boost returns on equity by 2021 outlined under predecessor A.M. Naik, now L&T’s chairman.

The small electrical and automation unit being offloaded delivered at least a 20 percent return on capital employed, according to analysts at IIFL. That compares to L&T’s overall return on equity of around 12 percent. More broadly, performance has lagged rivals. Including reinvested dividends, L&T returned 121 percent over the past five years, according to Datastream. That’s roughly a third as much as smaller rival KEC International and less than foreign-backed ABB India .

The sale received a muted reaction from L&T investors, who may be waiting for a bigger sign of what’s to come. In September, Naik said the company could sell or close up to 10 non-core businesses. If they clearly align with the company’s outlined goals, future disposals may provide a bigger spark.

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- India’s Larsen & Toubro agreed on May 1 to sell its electrical and automation business for 140 billion rupees ($2.1 billion) to Schneider Electric in partnership with Singaporean investment fund Temasek.

- Schneider intends to merge the business with its low voltage and industrial automation products business in India. Temasek will invest $760 million for a 35 percent stake in the combined company.

- For previous columns by the author, Reuters customers can click on


Editing by Jeffrey Goldfarb and Katrina Hamlin

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