The $14.3 billion engineering and infrastructure giant Larsen & Toubro (L&T) is foraying into the mining sector in India. The board of the company's fledgling infrastructure subsidiary, L&T Infrastructure Development Projects (L&T IDPL), recently cleared a proposal to operate coal, iron ore, bauxite and limestone mines.
L&T IDPL was established as part of Chairman AM Naik's restructuring of L&T into nine independent companies for better operational control, management and unlocking of value. IDPL operates as a holding company for public-private partnership projects in roads, bridges, ports, metro rail, power transmission, water and railways.
The subsidiary has a portfolio of over $7.5 billion (Rs 45,000 crore) comprising 23 projects.
The decision to plunge into mining comes close on the heels of the BJP-led NDA government permitting private players including subsidiaries of foreign companies to mine coal.
So far, L&T's exposure to mining was limited to supplying machinery and spare parts.
L&T sees a huge opportunity in the mining sector as the new government under Prime Minister Narendra Modi will provide more clarity in the policies, which in turn will encourage foreign players to set a base in India.
Already, companies including Rio Tinto, ThyssenKrupp and Hyundai have shown interest in the mining sector. India, with coal reserves of 250 billion tonnes, depends on imported coal to a large extent.
Ditto is the situation in iron ore where, after being an exporter, India is now an importer of iron ore.
Policy issues and environmental concerns in the previous UPA government impacted the mining sector severely.
The L&T subsidiary is exploring newer opportunities for diversification. The entry into mining fits in well because the company already supplies some machinery to mining companies.
The portfolio of IDPL is heavily loaded towards roads, where returns in the future are expected to be limited because of aggressive bidding for projects in the boom period.
The company also has large fund requirement for road projects under various stage of development. The work on the Hyderabad metro, which the company was awarded in 2010, is under progress.
The company is not looking at an initial public offering to raise funds for the time being. L&T has recently sold Dhamra port, which was strategically located in the mineral-rich Odisha to Adani Group.
A Canadian Investment fund has also agreed to invest Rs 2,000 crore into the company's equity by way of a convertible debenture.