L&T Infotech IPO will excite employees, but put them under pressure: A.M. Naik8 min read . Updated: 11 Jul 2016, 05:54 PM IST
L&T chairman AM Naik says L&T Infotech will make tactical and important acquisitions after April 2017
Mumbai: A.M. Naik, group executive chairman at India’s largest engineering and construction company Larsen and Toubro Ltd (L&T), said the idea behind selling shares in the group’s software services unit L&T Infotech to the public is not to raise money, but to excite employees and to put them under pressure from the “external world".
Naik, 74, in an interview on Friday, said L&T Infotech will make “tactical and important" acquisitions after April 2017, by when the firm will reorganize itself. The strategic intent for L&T Infotech is to double its revenue and profit in three years, helped by the parent’s synergies and support. Naik, who is reorienting the group for its next leg of growth, said four services businesses—infotech, technology, finance and real estate—will form the group’s core and cushion the group from the riskier projects business.
“Physical work is for L&T and digital for Infotech," said Naik, placing his bets on smart cities, defence and new-age technology sectors. Naik also indicated that another group unit, L&T Technology Services, will launch its initial public offering (IPO) in the coming months.
The L&T InfoTech IPO will open on 11 July and close on 13 July. Edited excerpts:
Why are you launching an IPO for L&T Infotech now?
I am confident that the company has achieved its maturity level and is poised for a complete reorientation and change. In the industry today, we are small and nimble, and we will learn faster. And the L&T group opportunity—see we started Smart World (smart cities) as a business three years ago, which has reached ₹ 1,100 crore (revenue) and will grow five times in the next five years.
Every single business, if you see, has something or the other ‘smart’ to be done. We are the only company that can build the whole city, because we are in infrastructure and construction building, and do a number of smart things that go into it. We have formed a group called Smart World, which has won many contracts including security projects in Mumbai, Hyderabad, smart city of Jaipur and others. We have taken 60% of this market’s share. L&T Infotech is going to do this work. Physical work is for L&T and digital for Infotech. Turnkey projects of both physical and digital will be bid by Larsen and Toubro—L&T can do the construction and bring in Infotech to do all the smart things.
That is the biggest advantage L&T has, to the extent that L&T is very well-connected around the world. Number of new technology partnerships are coming in our favour. Obviously, they are coming in the favour of the big boys (larger competition) also, but we are not lagging behind.
So the parental guidance will remain for L&T Infotech?
After IPO, day-to-day operation will be conducted by that company (L&T Infotech) and they will be completely autonomous like L&T Finance Ltd. Management team will manage the business and L&T, as a major shareholder, will provide all the major opportunities for it to grow fast. That is the synergetic value.
For transferring of employees from L&T who are in internal IT business, our rule is you have to work for three years in the current role, after which you can ask for a transfer in another group company. And the majority of them opt for Infotech or L&T Technology Services Ltd. So it will continue to get talent from L&T.
And then of course, we are not going to keep quiet; we are going to have tactical and very important acquisitions after April 2017. Because we have to digest this IPO, we have to reorganize quickly, bring partnerships, start implementing new-age technologies, and parallelly, we are looking at new technological acquisitions that we can have. I think it is the right time (for IPO), you cannot say it is the right time or last year could have been the right time or the coming year. I mean that can be debated, but I think we are within the bounds of being in the right time.
But it seems like a small IPO, just over 1,200 crore...
Money is not the issue, we are not going after money. Many companies have to do an IPO for money. We are doing an IPO to excite employees and to put them under pressure, let’s say, external world’s pressure in terms of benchmarking, comparing. The management of the company will be asked questions and scrutinized; nobody is going to come to me even though I may be the chairman. Now, the company’s performance will be scrutinized every quarter and that will bring about a lot of awareness for change. You take example of TCS (Tata Consultancy Services Ltd). Since 2006, they have expanded 12 times in 10 years once they were freed. Here, I am not only freeing them (L&T Infotech), I continue to give them all L&T group benefits.
Every father wants their son and daughter to do better than them. So this (L&T Infotech) is my baby, it has now become little more than a teenager, and is now going to college. It is distanced by physical means but the heart remains connected. I’m freeing them, but they will have to perform to save themselves.
What is the strategic intent for L&T Infotech’s performance?
The strategic intent is to grow L&T Infotech to double its size (revenue and profit) in three years. Second, to innovate and recreate the entire offering to high-tech and new-age technology orientation. Third, being part of L&T Group, mutual benefits will be sought. Infotech will be given a lot of learning out of domain that L&T has, and L&T will expedite its implementation on all businesses. Then retaining employees, the reason why I started this company, by way of stock options and excitement of making this IPO a great success...
There is a lot of opportunity in the six sectors that we cater to—insurance, banking and finance, oil and gas, manufacturing, consumer packaged goods and high-tech. With changing technology, we would rather focus on these six.
Are you looking to launch an IPO for L&T Technology Services business?
They will also come up in a few months (with IPO). We have kept Infotech and Technology Services separate. In IT business, we are number six (rank), but poor number six in the sense that there is a huge gap between number one and six.
Even if I had both the companies together, I would still have been number six. General perception is that mid-sized companies will die as consolidation takes place; today, I have positioned L&T and I tell all the customers that in the rat race of having to add 100 accounts every year, something or the other suffers; we are a mid-sized company and we are nimble, so we will serve you well.
Do you have any regrets with Infotech?
One regret is that we acted immediately when Satyam Computer Services (founded by Ramalinga Raju) price started going down and we came to know there is some scam and when it came down from ₹ 300 to ₹ 125, we started buying and finally it went down to ₹ 27-28. We stopped when we were already holding some 8-9% and that became ₹ 80. When we did the valuation of the whole company, we were the only one in the running, I got a call from PMO (Prime Minister’s Office) office, from information technology ministry, saying we have to save this company and you come forward, so we came forward.
But we should not have acted hurriedly and taken those equity ahead of time because valuation of that in our mind was ₹ 56 and we were saddled with ₹ 80 already. So, we had to beat ₹ 47 to average out to ₹ 56. Mahindra (Tech Mahindra) came at the last minute, they didn’t have any stock at high price, so they bid at ₹ 57 and took it. That is the only regret. But you cannot live in regret, you have to look forward to future with hope and aspiration.
You are looking at your IT and financial services businesses to lead your future growth. Will those businesses see higher capital allocation?
The projects business is hugely risky. In hydrocarbons business, when we went to the Middle East, we lost ₹ 2,000 crore. Had I not started Infotech, which I started mainly to protect my employees, the same people would have left. If I don’t progress and they don’t progress. Three years ago, we created a beautiful real estate business with our own land parcel. Then along with L&T Technology and L&T Finance, we have positioned these four as services companies, which came up with ₹ 2,600 crore profit. If I didn’t have these, I would have been in deep trouble.
We are the only EPC (engineering, procurement, construction) company in the world with highest profit of 6-7% PAT (profit after tax). No company has a market cap in double digit, we have a market cap of $22 billion. If one project goes bad—for example, we are doing a $2 billion metro project in Saudi Arabia—if it does not do well, I am doomed.
So I need services sector as core sector to cushion any of those problems. Therefore, IT is 15% PAT, technology is 15%, realty is about 17-18% PAT, manufacturing is 8-9%, project is 5-6%. On an average, we are in a position to grow PAT by 8-9% and that is what is reflecting in L&T’s market cap being much higher than any other EPC company.