Mumbai: In a hurriedly arranged conference call with around 100 equity analysts on Tuesday morning—before the stock markets opened for trading—senior officials at engineering firm Larsen and Toubro Ltd (L&T), led by chairman and managing director A.M. Naik, strove to assuage investor fears that have led its share price to drop like a stone after L&T increased its stake in scam-scarred technology outsourcing firm Satyam Computer Services Ltd.
Two analysts at the conference, who later spoke to Mint on condition of anonymity, inferred that the L&T management would go “all out” to acquire control and perhaps even a seat on the Satyam board of directors. They were given to understand that Satyam employees are happy with the L&T association and that L&T knew more about Satyam than there is in the public domain. The analysts also said they got the impression that the L&T management was in constant touch with the government and the Satyam board.
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The reconstituted Satyam board currently has six members, with the government suggesting that it could add four more members later.
“The problem is that Satyam is a black box. Nobody knows what it contains. That is a big concern,” an analyst tracking L&T for a foreign brokerage firm said.
L&T owned around 4% of Satyam on 7 January, the day Satyam founder B. Ramalinga Raju made his sensational disclosure that he has cooked the company’s books to the tune of Rs7,136 crore over the years.
The engineering firm has since then raised its stake to 12% by buying Satyam shares in the open market, even as foreign funds exited the stock. Investors have been worried about this decision to plunge deeper into the troubled technology company.
The L&T share price has fallen 17.72% since 7 January even as the benchmark Sensex has dropped 6.08%. The market value of L&T has shrunk by Rs8,043.14 crore. The share came close to its 52-week low of Rs611 on Tuesday, before recovering to Rs638.20. Meanwhile, Satyam jumped 21.36% in Tuesday’s trading to Rs47.15 because of the interest shown by L&T.
Calming investors about its investment in Satyam is part of a bigger task that Naik could face, as L&T’s growing portfolio of strategic investments in listed companies comes under scrutiny.
Credit Suisse analysts Venugopal Garre and Harishankar Ramamoorthy in a 27 January research report titled, Exposure to capital markets- Satyam, NIIT Technologies, Federal Bank..What more?, wrote, “While the absolute amount of loss might appear tiny when compared to overall profits, concerns stem from an increase in risk profile from such financial investments.”
According to analysts, perceptions about L&T will change. There are investors who may not want an exposure into financial services. A subsidiary has investments in Federal Bank Ltd and City Union Bank Ltd, in addition to its exposure in more than two wholly owned financial arms.
“These days financial services require more funds and some investors may not like an exposure into financial services,” the analyst, who preferred not be named, said. “Financial services and IT services will require more cash, and debt gearing levels at L&T will have to change. L&T’s plans to list its subsidiaries need to be clearer.”
“Why do they want to be in IT?” the analyst asked rhetorically. L&T Infotech Ltd, L&T’s in-house subsidiary, has unsuccessfully competed for nearly a decade with its big-four peers—Tata Consultancy Services Ltd, Infosys Technologies Ltd, Wipro Ltd and Satyam—but could not grow to their their size or stature.
In March, L&T Infotech earned revenue of Rs1,573 crore and a profit after tax of Rs211 crore, with an employee size of 9,500.
Satyam could bring L&T Infotech a few notable clients and very skilled employees, which it has found difficult to attract over the years.
According to an analyst, the L&T management may consider its investments as a strategic long-term investment and hence may not book mark-to- market losses, though conservative accounting practices suggest that the company should be booking losses on a quarterly basis.
Graphics by Ahmed Raza Khan / Mint