L&T’s services businesses to be at centre of growth: A.M. Naik2 min read . Updated: 05 Jul 2016, 02:01 PM IST
Executive chairman A.M. Naik says sectors such as digitization, smart cities and defence will be the key focus areas of investments for Larsen and Toubro
Mumbai: Larsen and Toubro Ltd (L&T), the country’s largest engineering and construction company, will cushion its future growth by depending more on its information technology (IT) and financial services businesses as it tries to offset headwinds from the riskier projects business, said group executive chairman A.M. Naik on Monday.
As part of the group’s yet to be announced five-year plan, the services businesses will be at the centre of its growth vision, Naik said. Sectors such as digitization, smart cities and defence will be the key focus areas of investments for the group. Naik declined to share the details of the five-year plan, pending subsidiary L&T Infotech’s initial public offering (IPO) next week.
With mainstay projects business being comparatively risky, its services businesses such as Infotech and Financial Services will support the group in time to come as they are more steady in income and profit, Naik said. Nearly half of L&T’s $15 billion revenue in fiscal year 2016 was from the infrastructure business.
This gradual shift in focus for the group stems from the need to expand its high-growth and high-margin businesses, said Maybank Kim Eng Securities analyst Anubhav Gupta. “Undoubtedly, the finance and IT business have better RoE (return on equity) compared to the infrastructure business, which today is still struggling. Hence, capital employment will be higher toward businesses that can generate higher RoEs," Gupta said.
L&T has in recent years been hurt by stalled industrial projects and a private investment cycle that’s yet to take off, coupled with slower growth in key overseas markets. The company, with its 82 business units, runs under a complex structure and is trying to simplify itself by divesting or monetizing non-core assets. Increased capital expenditure in certain businesses, including infrastructure subsidiary L&T IDPL, has seen L&T’s RoE nearly halve, Mint reported on 18 November.
Last year, the company said it would not invest in new investment-heavy infrastructure projects in a bid to follow an asset-light model. It has also been exploring monetization of its operational assets by way of infrastructure investment trusts. It runs a loss-making portfolio of 17 road projects, of which 13 are operational, and is also building the Hyderabad Metro project.
“The theme for L&T over the next five years will be digitization in all areas of the group—from monitoring costs to revenue. Businesses such as smart cities and defence will use digitization and technology," said another analyst, asking not to be named, as he is not authorized to speak to the media.
L&T on Monday announced the IPO of IT services subsidiary L&T Infotech, looking to raise over ₹ 1,200 crore. Naik said Infotech will double revenue and profit in the next three to four years from $887 million ( ₹ 5,847.1 crore) and ₹ 922.3 crore in fiscal 2016, respectively.
While the investment sentiment has seen an improvement in recent months, the investment cycle was still some time away, said chief financial officer R. Shankar Raman on Monday.
“For Infrastructure investment, the company will have to wait for a better cycle and an overall pick-up in demand. They can then see the 10-12% order inflow growth they have been aiming for," Gupta of Maybank said.