L&T's Hyderabad Metro Exit: Unraveling the ₹6,600 Crore PPP Breakdown and Lessons for India's Infrastructure Future

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Introduction

The Hyderabad Metro Rail project, one of India's largest urban transit initiatives under a public-private partnership (PPP) model, has been a landmark effort to enhance public transportation in the city of Hyderabad, Telangana. Launched with high expectations, the project aimed to alleviate traffic congestion, promote economic growth, and integrate sustainable urban mobility. Larsen & Toubro (L&T), a leading Indian infrastructure conglomerate, played a pivotal role as the primary developer and operator through its special purpose vehicle (SPV), L&T Metro Rail Hyderabad Limited (L&TMRHL). However, after nearly a decade of involvement, L&T formally exited the project in late September 2025, handing over operations to the Telangana state government. This exit marks a significant shift, highlighting the challenges of PPPs in large-scale infrastructure projects. The decision was driven by escalating financial losses, operational hurdles, and insufficient governmental support, culminating in a settlement that allowed the state to assume full control. This case study provides a detailed analysis of the reasons behind L&T's exit, supported by financial data, historical context, and broader implications.

Background of the Hyderabad Metro Rail Project

The origins of the Hyderabad Metro trace back to 2003 when the National Democratic Alliance (NDA) government identified the need for a metro system to supplement the existing Multi-Modal Transport System (MMTS), which was inadequate for the city's growing population. The Union Ministry of Urban Development approved the project, and the Delhi Metro Rail Corporation prepared a Detailed Project Report (DPR). In 2007, the Andhra Pradesh government (pre-bifurcation of Telangana) established Hyderabad Metro Rail Limited (HMRL) as a public entity to oversee the project. The Central Government sanctioned ₹1,639 crore under the Viability Gap Funding (VGF) scheme to bridge the funding gap.

The project was structured as a PPP, with L&T emerging as the lowest bidder in July 2010 for ₹12,132 crore, securing ₹1,458 crore in VGF against the total sanctioned ₹4,853 crore. L&T formed L&TMRHL, holding a 90% equity stake, while the Government of Telangana (post-2014 bifurcation) held 10%. A consortium of 10 banks, led by the State Bank of India, provided debt financing, marking it as the largest non-power PPP fund tie-up at the time. L&T was responsible for design, construction, operation, and maintenance, as well as generating non-fare revenue through real estate developments like malls and transit-oriented projects.

Phase-I of the metro, spanning 67.21 km across three elevated corridors (Blue, Red, and Green) with 59 stations, was budgeted at ₹14,132 crore but escalated to ₹18,800 crore by 2017 due to delays. Construction began in April 2012, with the first corridor opening in November 2017 and full completion by February 2020. Despite initial optimism, the project faced early setbacks, including the cancellation of the original contract with Maytas Infra in 2009 due to financial closure failures, leading to rebidding.

Phase-II, planned to add about 163 km including airport connectivity, was delayed multiple times. It was revised in 2022 and split into Phase 2A (76.2 km, ₹24,269 crore) and Phase 2B (86 km, ₹19,579 crore), with approvals in 2024 and 2025, but central government funding remained pending as of September 2025.

Key Reasons for L&T's Exit

L&T's decision to exit was not abrupt but the result of accumulated issues over years. The company had been signaling its intent since at least 2020, citing unsustainable operations. Below is a clear breakdown of the primary reasons:

1. Massive Financial Losses and Debt Burden

The most prominent factor was the project's chronic unprofitability. L&T reported cumulative losses exceeding ₹6,600 crore since operations began in 2017, with total expenditure reaching ₹14,000 crore, including ₹7,000 crore in direct losses. The debt burden stood at ₹13,000 crore, financed through high-interest loans that compounded the financial strain. Ridership, a key revenue driver, consistently fell short of projections—peaking at around 5 lakh passengers daily but insufficient to cover operational costs of approximately ₹500-600 crore annually. Non-fare revenues from real estate and advertising also underperformed, contributing only marginally.

L&T's Chairman and Managing Director, S.N. Subrahmanyan, highlighted that the company could no longer sustain these losses without viability, especially as the project failed to achieve break-even. By February 2020, losses had already crossed ₹5,000 crore, and the company sought fare revisions and additional funding, which were not adequately addressed.

2. Operational Challenges and Cost Overruns

Operational inefficiencies plagued the project from the outset. Delays in land acquisition, site handovers, and regulatory approvals led to significant cost escalations—L&T requested an additional ₹3,756 crore in 2017 to compensate for these issues. The elevated structure, while cost-effective compared to underground options, still encountered geological challenges like hard rock terrain, increasing construction costs.

Post-launch, integration issues with other transport modes (e.g., buses and MMTS) reduced feeder traffic, impacting ridership. The Telangana government's free bus travel scheme for women, introduced in recent years, was cited as diverting potential metro users, further eroding revenues. Additionally, L&T faced challenges in scaling non-core activities, such as developing 'Office Bubbles' and other transit-oriented developments, which did not yield expected returns

3. Impact of the COVID-19 Pandemic

The pandemic exacerbated existing vulnerabilities. A 169-day shutdown in 2020 led to a drastic drop in ridership—from pre-COVID averages of 4-5 lakh passengers daily to near-zero during lockdowns. This resulted in an additional ₹382 crore in losses, with recovery slow due to lingering public health concerns and work-from-home trends. The shutdown not only halted revenues but also delayed Phase-II planning, as L&T's financial health deteriorated further.

4. Lack of Adequate Government Support

L&T repeatedly criticized the Telangana government for insufficient backing. Despite promises under the PPP framework, the state delayed viability gap funding, interest-free loans (e.g., ₹2,100 crore still owed from a ₹3,000 crore agreement signed in July 2022), and fare hikes. L&T proposed integrating Phase-I and Phase-II for seamless operations and revenue sharing, but negotiations stalled over cost mechanisms and equity participation. The company offered its stake to the central or state governments multiple times but received no viable response until 2025.

Political changes, including the shift to the Congress government in Telangana, were also blamed in some quarters for incompetence in handling the project, though this remains a partisan view.

5. Strategic Business Decision

Beyond project-specific issues, L&T's exit aligns with its broader corporate strategy to divest non-core, loss-making assets. The company aims to reduce overall debt to ₹8,000 crore by FY2026 and focus on profitable ventures. L&T explicitly stated it would not bid for Phase-II, viewing the metro as no longer aligning with its portfolio priorities

Timeline of Key Events

• 2003-2010: Project conceptualization, DPR approval, and L&T wins PPP bid.

• 2012-2020: Construction and phased launches of Phase-I.

• 2020: COVID-19 shutdown causes massive losses; L&T signals intent to exit.

• 2022: Supplementary concession agreement for ₹3,000 crore loan; Phase-II revival.

• 2023-2024: Ongoing negotiations; Phase-II approvals.

• September 2025: L&T formally requests exit; offers equity.

• Late September 2025: Agreement reached; L&T exits, state takes over.

Financial Implications and Settlement

The exit involved a negotiated settlement where the Telangana government agreed to absorb ₹13,000 crore in debt and pay L&T a one-time ₹2,000 crore for its equity stake, totaling around ₹15,000 crore. L&T had initially demanded ₹20,000 crore (including equity, losses, and loans), but accepted the lower offer to expedite the process. This clears L&T's balance sheet while shifting the burden to the state, which plans to convert the project into a state-central joint venture for Phase-II funding. The takeover ensures continuity of operations without disruption to passengers.

Conclusion

L&T's exit from the Hyderabad Metro Rail project exemplifies the complexities of executing large-scale infrastructure under PPPs in India. While the company invested significantly in building a world-class system, persistent financial hemorrhaging, operational bottlenecks, external shocks like COVID-19, and limited governmental support rendered continuation untenable. The handover to the Telangana government, effective as of late September 2025, offers a fresh start for the metro's expansion but raises questions about the viability of private participation in similar ventures. This case emphasizes the importance of balanced risk allocation, timely support, and adaptive strategies to ensure the success of urban infrastructure projects.