IPO-bound L&T Infotech on thriving in tough IT environment

Naik: L&T group largely can be classified into three major sectors. One is very high-tech manufacturing, second is complex projects and the third sector is the services sector.

In services, we have L&T Finance where we own 64 percent, L&T Infotech, in which we will own 90 percent roughly [post IPO] and L&T Technologies. Over time, we will dilute more as per the requirement of the regulator. And then of course we have L&T Realty. We have a huge land bank of our own. So, therefore it is a very steady income business as well.

We consider the services sector as a cushioning effect to our overall portfolio -- a balancing act. Our manufacturing business is somewhat risky because we are in areas like heavy nuclear reactors and defence etc. The projects business is even more risky than manufacturing. The least risky is the services sector because the order values are smaller and therefore even if you lose money, the impact overall is not very high per project.

If you have a project worth USD 2.5 billion to build an airport, just imagine Mumbai Airport, it has been built by L&T. Imagine the number of systems there are in it and what could go wrong. If 1-2 things go wrong, the amount of money you lose is enormous.

So, the importance is more so than ever before for services sector to be the core of core for L&T in our overall portfolio balancing act. All I can say is it is very important.

Q: So, in the long term L&T Infotech, L&T Technology, the IT sector continues to remain core to the group as a whole?

Naik: Correct.

Q: As Mr Naik was pointing out there will be a gradual dilution but the IT sector will continue to remain core. What kind of dilution could we look at for Infotech, specially to meet the public shareholding norms, what is kind of dilution that we could look at after the IPO as well?

Raman: L&T Infotech is going to remain a key subsidiary of L&T for quite some time. We are very keen that the stock post dilution should trade well (should be liquid and have high free float) and we are confident that our performance would lead to that and there is a three year window that is available for minimum public shareholding to reach 25 percent level. So, if you take the dilution that we are doing in the IPO market today together with outstanding options, stock option schemes that we have, maybe the company on a fully diluted basis could already be at about 17-18 percent diluted level. So, the additional 6-7 percent that will be required to meet the statutory requirement could be done over this three year window period.

At that time we will take a pause and see how the plans play out that is how successful or robust the platform has become and how much or resource would that company require to grow further. So, we will take a call at that time.

Q: Mr Naik has always maintained that there is no rush in the IPO, you took your time. Give me the rationale behind the current valuation as is while keeping in mind the kind of market volatility that you are seeing?

Jalona: Volatility has got something to do with global events that has overtaken the market. It is true that we were not rushing into it because of a couple of reasons. One is the organisation needs to be well set for an IPO, the processes of a listed company is very different as compared to an unlisted company. Even if it is an unlisted subsidiary of a listed subsidiary.

So, we had to build our team, we had to build our process and we have done that well and with confidence we can enter the market now.

In terms of valuation, it is a perception and it is a question of timing as well. We do think that notwithstanding the volatility of the market, India is in a unique sweet spot today if you look at all the global markets. There are far more concerns in the global markets as compared to India and given the political leadership and the themes that have been spoken about. India is attracting a lot of attention from the global fund managers.

And given the scarcity of issues where very few IT companies or technology services companies of our size are present in the marketplace, it makes it very attractive. We do think the time is right and we have taken the step.

Q: Talking about macro volatility, the fact of the matter is at this point in time people are talking about cost cutting, people are talking about order pipeline, thinking, clients deferring contracts, I agree that you don't have much exposure to UK but what are the immediate concerns that you will have to watch out for in the next one year as far as the macro environment is concerned because Europe continues to remain volatile. North America as well is seeing deferment of some contracts.

Jalona: What you said is very true. However, overall I think in the last 3-4 years there has been so much volatility and organisations that deal with volatility and have a very resilient portfolios are the ones that are going to grow.

So, let us look at oil and gas as an example. We have seen it take a toll on ourselves but the important part is over the last three years while the percentage of revenues in oil and gas has decreased, we have actually increased the pie that we do because we are very differentiated.

The solution to all the problems is differentiation. If you are differentiated, you will continue to grow and that will remain our continued focus for us in the marketplace. We need to have differentiation and we need to launch new service lines and we need to have the reach, going to the customers and telling our stories.

Once the stories we tell get reflected in revenue productivity per employee and when you look at our numbers, we are actually very well placed on that which is a sign of a differentiation.

Q: What will you be watchful for? Which sectors will you watch out for in the next two years, energy, oil and gas?

Jalona: It is important to have a resilience in the portfolio. Let us take the example of oil and gas. We were very dependent on the upstream customers. When the crude is at the price at which it is today, upstream customers totally clamped down on their capital projects. However the midstream and the downstream, the speciality chemicals company -- because the oil price was at such a low price -- they were spending a lot of money.

So, in oil and gas we have diversified our portfolio to upstream, midstream and downstream as well. Similar to that as an organisation, for us we need to have profitable growth and a very resilient portfolio. Our focus will be to just establish ourselves in the portfolio in a very meaningful way, grow the accounts that we have to a meaningfully size whereby the entire portfolio rebalances itself.

Q: What is the plan as far as the larger vision of L&T Infotech is concerned. I have been asking every CEO of L&T Infotech when you will cross that USD 1 billion mark. I understand you can't give guidance but what would be your sweet spot, how soon would you want to cross that?

Naik: Considering the way the industry is organised, they have IT and engineering in the same company. To that extent we have already crossed USD 1.4 billion between the two companies. It was a decision of the management that technology should focus on engineering, Infotech should focus on IT in this rapidly changing world.

Also this rapidly changing world has a lot of integrating solution between the two companies. Therefore we had a cross selling workshop, both organisations should help each other in each company but at the same time retain their dominance in what they know best.

So, this is the kind of very well thought of solution that we found. So, in a way this year we will even cross USD 1.5 billion but we have already done more than USD 1.35 billion or so already last year. So, there is no doubt in my mind that both companies will do well and both will help each other. Almost every fortnight I hear one example or the other where one of the company let's say introduced the other company to the same client they were already in and that helped them.

Q: Synergies will continue even after the listing?

Naik: Right. With all of these efforts both companies will grow with their degree of focus on what they know best and at the same time take the benefit of synergy and both will be uniquely positioned in the market. As I said, we may not be the biggest but we will be the best.

Q: Could you give us a timeline as to by when will you file the DRHP or by when would you hit the stock exchanges roughly?

Naik: We haven’t made up our mind but when I say few months, it is few months.