Larsen & Toubro’s plan to sell its electrical and automation business will help it fund almost 50% of the infrastructure equity required for its total capital expenditure of Rs61,300 crore, feel experts.

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The electrical and automation business of the country’s largest engineering and construction company, formerly called electrical and electronics business, has been valued at Rs8,900 crore by Bank of America Merrill Lynch, a lot less than the $3 billion mentioned in earlier media reports.

“L&T is set for Rs61,300 crore of capex in infra development businesses, which needs about Rs18,400 crore (assuming 30%) as equity,” Bank of America Merrill Lynch analyst Bharat Parekh wrote in a note on Monday. “This in our view is part of L&T’s move to exit businesses which are dilutive on returns, where it doesn’t have clear leadership and reallocate capital.”

At a board meeting last Wednesday, the L&T board approved the demerger of its electrical and automation division at a board meeting and is looking for a good valuation considering it is the dominant player in switchgears, which control the flow of energy in electrical power systems such as generators, motors and transformers.

“We are eyeing a 15-20% growth in our business,” L&T senior vice-president (electrical and automation) Sharat C Bhargava said.

Experts say the business, which had revenues of a little less than Rs3,000 crore last fiscal, looks non-core when viewed from the working capital angle.      The business needed a working capital of Rs1,132 crore to generate sales of under Rs3,000 crore in the year to March 31, 2010. On the other hand, L&T’s total working capital requirement was Rs7,850 crore, to generate sales of Rs37,000 crore.A company spokesperson declined to comment.

However, Parekh warned that L&T’s strategy of selling the electrical and automation business to help meet its overall project costs is fraught with risk on account of lower return on expenditure in high-cost projects like power and metro projects.

L&T has 23 subsidiaries and 27 associates across sectors, including power generation and ship building. 

“However, we are not convinced that the new infra assets of L&T could create value versus its asset light E&E… Capex in lower RoE infra assets - Rajpura Power, Hyderabad metro etc are risky,” the report added.

The Indian market contributes 70% to L&T’s revenue. The company has a 30% share in the country’s electrical and automation market. It has manufacturing units in Navi Mumbai, Ahmednagar, Mysore, Powai and Coimbatore.