Mumbai: Larsen and Toubro Ltd (L&T), India’s largest engineering and construction company, is readying to take two of its units public.

In the lead-up to the initial share sales in L&T Infotech Ltd and L&T Technology Services Ltd, the $14 billion group plans to acquire smaller companies and offer employee stock options (Esops) to hire and retain top talent, group executive chairman A.M. Naik said in an interview on Tuesday.

The initial public offering (IPO) process for L&T Infotech and L&T Technology Services will start in July 2016, Naik said. In terms of preparing the companies for the IPOs, the process will begin much earlier—on 1 October 2015.

The two subsidiaries will follow L&T Finance Holdings Ltd, which in July 2011 became the first L&T subsidiary to go public, in tapping the capital market for funds.

“My next step is to take these two companies to the next level and for that I need top-class talent and to get this kind of talent in an otherwise semi-branded company is not easy," Naik said. “Once we give a stock option pre-IPO, we can get terrific people as they will know they can make money after the IPO."

L&T Finance, which offers financial products, raised 1,245 crore in its IPO, attracting demand for 5.34 times the value of shares on offer. The shares have risen 57.6% from the price at which they were sold. 

L&T is making plans for the twin IPOs two years ahead at a time when India’s equity markets are upbeat about the prospects of economic growth rebounding and reforms getting a renewed push under Prime Minister Narendra Modi.

Since the beginning of this year, the benchmark Sensex has gained 20.8% and foreign institutional investors have bought a net $9.09 billion of shares from local equity markets.

L&T is “very deeply committed" to the planned IPOs in L&T Infotech and L&T Technology Services and “we are very careful with whatever we bring to the market", Naik said.

L&T Infotech, founded in 1997, is an information technology services company based in Mumbai. L&T Technology Services, founded in August 2013, is an engineering services provider in areas including industrial products, medical devices, transportation and telecom.

Naik, who has just completed 50 years in L&T and started as a junior engineer, said L&T had decided to take these two companies public once Infotech crosses $1 billion in revenue and Technology Services crosses $500 million.

“This year we will come close to $1 billion in Infotech and close to $450 million in services," he said.

L&T said it will report its financial results on a consolidated basis from next quarter, including the earnings of L&T Infotech and L&T Technology Services.

L&T has hired consulting firm McKinsey & Co. to assist these two companies to hone their core competencies before they go public.

“We are working with McKinsey to set right both the companies. They are helping us with cost optimization, operational excellence, putting up a strong marketing and business development team, hiring industry leaders and hopefully we will finish that by March 2015," Naik said.

“The listing will help L&T in two ways—one, that proper disclosure by the management will lead to a better price discovery for these two companies, and two, it could lead to a possibility of selling a stake in the future and infusing the same in its asset development businesses. What is interesting to see is how they approach the listing of the related businesses like hydrocarbon etc., in the future, once they finish listing their non-related businesses like IT and engineering services," said Nitin Bhasin, infrastructure analyst at Ambit Capital Pvt. Ltd.

L&T will scout for acquisitions in the run-up to the IPOs.

“We have to see if we get some opportunity in specific areas to do some acquisitions, and efforts are on," Naik said. “We missed acquiring Satyam Computer Services Ltd. We are open to acquisitions of
$200-300 million in specific areas where we are weak."

In 2009, Hyderabad-based Satyam was bought in a government-supervised auction by Mahindra group-controlled Tech Mahindra Ltd, after Satyam fell into a crisis following a confession by its founder B. Ramalinga Raju that the company had been misstating its accounts for years.

“We could have done much better if we were sharply focused (on the two businesses) in the past. Initially we invested in all sorts of things," Naik said.

Naik said L&T is open for small-ticket acquisitions of around $30-40 million for its engineering services company.

He said the formalities of transferring assets to these two companies had been completed. The remaining engineering services business from the parent company and Infotech has already been transferred to L&T Technology Services.

After the IPOs, L&T risks losing the cushion provided by the infotech and engineering services units, given that the pure engineering, procurement and construction business that it’s engaged in is riskier, experts said.

In a June report, domestic securities house Morning Star said competition in the domestic and international engineering and construction, or E&C, business remains fierce, and it does not view L&T as being necessarily in an advantageous position.

Still, L&T stands apart from competitors in the E&C industry with its healthy balance sheet, stellar execution track record, and ability to execute large-scale projects, the report said.

Shares of L&T fell 0.9% to 1,736.75 on BSE, while the Sensex rose 0.01% to 25,583.69 points. In the last three months, the stock gained 40.35% while the Sensex rose 16.64%.

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