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India’s stock markets have risen by about a third in the past three years. But for Larsen & Toubro Ltd, it’s as if time has stood still. While there have been ups and downs in its stock price, its market capitalization is currently at 1.8 trillion, the exact same level as three years ago.

Actually, things would have been far worse, but for the stellar performance of its IT services subsidiaries. The market capitalization of Larsen & Toubro Infotech Ltd and L&T Technology Services Ltd has risen by three times in the past three years. Even after applying a conglomerate discount of 20%, the value of L&T’s stake in these firms now account for nearly 30% of its total market capitalization.

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Add last year’s Mindtree acquisition to the mix, and the contribution of all IT services subsidiaries rises to 36%.

Mixed bag
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Mixed bag

But that’s pretty much where the group’s success stories end. L&T’s core engineering business has been the source of enormous value destruction for shareholders. After adjusting for the value of L&T’s stake in its subsidiaries, the residual value of the business has shrunk by 24%.

This is after applying a conglomerate discount of 20%. The market capitalization of its other listed subsidiary, L&T Finance Holdings Ltd, has fallen by over 40% in the past three years.

The glass half empty view on L&T is that it’s a one-trick pony, with its investments in IT firms saving it the blushes; the glass half full view is that timely diversification has saved the day for the conglomerate.

Either way, the contrast between the IT businesses and the rest of the pack is striking.

Shares of L&T Infotech, in particular, have been on a tear, with investors banking on gains from digitization due to the pandemic. LTI trades at about 26 times one-year forward earnings, which puts it at the top of the league tables along with market leader Tata Consultancy Services Ltd.

The core engineering business has always struggled to take off, says an analyst. Even though the infrastructure theme appears to hold immense potential, the fact remains that growth has been erratic.

There have also been concerns about capital allocation—while the Mindtree acquisition seems to be paying off, the same cannot be said about some other investments, such as in its finance subsidiary.

The company has also fallen behind on its target of achieving 18% return on equity by this fiscal. It ended FY20 with an ROE of 14%.

In this bleak backdrop, L&T’s attempt to unlock value by listing its IT subsidiaries in 2016 hasn’t helped its shareholders much.

What would have really helped L&T shareholders is if they had sold the parent company’s shares and bought shares of the subsidiaries instead to benefit from the unlocking.

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