Away from riskier EPC, L&T gives IT services another shot with Mindtree

A decade back, L&T Infotech (LTI) fought and lost a battle to acquire software services company Satyam. Having failed to achieve significant growth for LTI, parent Larsen & Toubro is giving its IT services ambition a second try with Mindtree.

In this process, L&T will create multiple firsts for itself — initiating a hostile takeover being one of them. 

A senior analyst tracking the conglomerate points out services is what L&T believes will get them the high return on equity. SN Subrahmanyan, chief executive officer (CEO) and managing director (MD) of L&T, also pointed out, “In hindsight one can say we did not look at retail and telecom, god has been kind to us. Having said that this area (services through IT) is still available to us.”

So far, L&T has not been able to live the grand IT services dream the same way as LTI’s peers. For instance, between FY12 and FY18, Tech Mahindra’s (TechM’s) net sales increased more than four times (461 per cent), while in the same period LTI’s net sales doubled (130 per cent). LTI lost the Satyam acquisition to TechM. 

Subrahmanyan hopes the Mindtree acquisition will give the group the scale it needs to expand in services. “This business (services) as it grows and enters bigger contracts, has to have size, has to have visibility and respect. That is what we are looking at.”

The ambition has also earned the conglomerate a reputation different from what it held so far. To begin with, the parent company has not made a significant acquisition in many years, leave aside a hostile one. 

Subrahmanyan insists the takeover is not hostile. “Siddhartha is emotional about his stake and we at L&T are emotional about our ownership. If not us, it would have gone to someone else,” he said, defending L&T’s takeover move. L&T thwarted a takeover attempt on its ownership in 2003 and group chairman AM Naik has been vocal about that hardship period in multiple media interviews in the past.

Though a first for the conglomerate, analysts still attribute the move to Naik’s decision making and not Subrahmanyan alone, who was appointed as the MD & CEO in July 2017, while AM Naik chose a non-executive chairman role starting October the same year. "This looks like a Naik decision, with SNS following the mentor," said the analyst quoted earlier.

Subrahmanyan, at the L&T’s Mumbai press conference, added: “The chairman has been advising us to look at the services business.”

This would also mean a change in strategy different from what L&T did in the last one decade. “Engineering, procurement and construction (EPC) and projects will go on, because there are people in that business and they have their ambitions. But when we look at the overall profile of the company, heavy investment that needs to be done (in EPC) has already been made in the past decade. We do not see any major factory or manufacturing unit would need to be put up,” Subrahmanyan said. 

He also indicated the engineering conglomerate may show greater focus on growing the services segment, adding if the company can grow the services sector slightly faster both on revenue and profits, it will have a significant impact on the weighted average profitability of L&T. 

“These businesses (services) from inherent nature are more profit making, contracts are less risky and growth can be faster than other business,” Subrahmanyan said, comparing the services business to engineering, procurement and construction (EPC).

He added that overall the company generates surplus cash and services seems to be a good future option.

Not everyone is happy with L&T’s means to achieve the services ambition. “Is this the end of sensible capital allocation? Possibly yes,” said the senior analyst quoted earlier in the story. Few others wish to see it as a short term investment move as buyback at present lacks approval.

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