L&T CMD A.M. Naik: He says L&T will list subsidiaries only after they have gained critical mass

Did you know that Larsen & Toubro (L&T), South and South East Asia's largest engineering and construction company, is also one of India's most successful corporate incubators? There's more: over the next eight years, it plans to list at least 10 subsidiaries to unlock value and create shareholder wealth. "We will list subsidiaries only after they achieve scaleable size," says A.M. Naik, Chairman and Managing Director, L&T. Adds Y.M. Deosthalee, CFO, L&T: "Our portfolio (of subsidiaries and associate or S&A companies) spans three broad verticals-manufacturing, services and projects."

These subsidiaries and associates-18 Indian subsidiaries, six foreign ones and 26 associate companies-are sitting on massive untapped value. Together, they account for 18 per cent of the group's total income of Rs 14,121 crore (for the 9-month period ended December 31, 2006) and 36 per cent of L&T's profits of Rs 1,099 crore during this period. And just the three fastest growing subsidiaries-L&T Infotech, L&T Infrastructure Development Projects (L&T IDPL) and L&T Finance-could have a combined value of more than Rs 8,000 crore. Says Satyam Agarwal, Senior Analyst, Motilal Oswal Securities, a Mumbai-based equity brokerage and research firm: "These three already account for about 18 per cent of L&T's total valuation of Rs 47,100 crore (as on March 2007)." He values L&T Infotech at Rs 4,677.5 crore, L&T IDPL at Rs 2,397.2 crore and L&T Finance at Rs 1,210.4 crore.

L&T Infotech, which is growing at 55-60 per cent per annum, is likely to be the first to tap the market. Says Deosthalee: "By 2008, when we plan to list L&T Infotech, it will hopefully account for about 8 per cent of the group's turnover compared to 4-5 per cent now." And a large part of L&T's overall growth will come from its subsidiaries and associate companies. "Over the next four years, these jewels will account for 30 per cent of our revenues," says Naik.

"By 2008, when we plan to list L&T Infotech, it will hopefully account for about 8 per cent of the group's turnover compared to 4-5 per cent now" Y.M. Deosthalee CFO/L&T

It's not just the L&T top brass that is excited at the prospects of these companies. Large investors are also casing them out. In April 2006, JP Morgan and India Development Fund invested Rs 300 crore and Rs 200 crore, respectively, for a combined 20 per cent stake in L&T IDPL, thus, valuing it at Rs 2,500 crore. "The valuation has improved since then as we have added many projects," says Naik, adding that he plans to list the company in 2010, by which time "we would have added even more revenue-generating projects". L&T has committed around Rs 1,200 crore as its share of equity in various projects being implemented by the company. "It will generate good cash flows as these projects become operational," says Deosthalee. L&T IDPL is L&T's main vehicle for investment in domestic infrastructure projects and has one of the largest and most diversified BOT portfolios in the country-31 projects in sectors such as roads, airports, ports, water supply and commercial property development. This portfolio is valued at Rs 15,000 crore. Says Agarwal: "By 2009-10, most of these projects will be generating healthy cash flows."

L&T Finance already has assets under management of Rs 2,500-3,000 crore. "Over the last three years, we have committed resources to ensure that this company becomes valuable," says Naik. The results are showing-the company expects profits to grow 80 per cent this year. For nine months ended December 2006, the company has reported a profit growth of 77 per cent to Rs 35.6 crore on the back of a 71 per cent growth in revenues to Rs 167 crore. Fuelling this growth is the decision to expand the scope of its operations to third party financing, compared to its earlier mandate of serving only L&T's customers.

Deosthalee says that by 2009-10, the services vertical-comprising L&T Infotech, L&T Finance and L&T IDPL-will account for 15 per cent of the group's business, up from 8 per cent at present.

The L&T brass may be betting big on services, but as of now it is still the manufacturing subsidiaries and associate companies that account for 37 per cent of the S&A pie. For the nine months ended December 31, 2006, this vertical reported a 40 per cent rise in net profit to Rs 94 crore (Rs 67 crore) on a 34 per cent increase in total income to Rs 1,455 crore (Rs 1,085 crore). "Three companies-L&T Komatsu, Audco India and ewac Alloys-account for 4-5 per cent of the group's revenues," says Agarwal. Incidentally, the three are valued at just over Rs 2,000 crore.

"Out of these subsidiaries-18 Indian, six foreign and 26 associate companies-by 2015 we will list 10 on the bourses" J.P. Nayak Director & President (Machinery & Industrial Products)/L&T

Of these, Audco India, which accounts for 45 per cent of that valuation, is the one to watch. A joint venture between L&T and the us-based Flowserve Corporation, the company manufactures industrial valves and operates in sectors such as oil and gas, nuclear power, aerospace and LNG, and has grown from revenues of Rs 100 crore eight years ago to a point where it is expected to cross Rs 1,000 crore in annual sales this year. Says Naik: "By 2012, Audco will clock half a billion dollars (Rs 2,050 crore) in revenues. And it will grow even faster if we take the inorganic route." Then, L&T is also placing huge bets on L&T Komatsu, which operates in the machinery and hydraulics segments. "This company will continue its 45 per cent growth momentum on the back of the India growth story," says Naik. Deosthalee, though, puts the issue in perspective by admitting that EWAC Alloys, though crucial to L&T's growth plans, is growing from a "small base". L&T Komatsu and EWAC Alloys registered total incomes of Rs 545 crore and Rs 78 crore, respectively, for the nine months ended December 31, 2006.

Meanwhile, L&T has announced a major capacity expansion at Hazira. It plans to invest Rs 1,000 crore on increasing its shipbuilding capacity from 15,000 dwt (dead weight tonne) to 2-3 lakh dwt and is setting up manufacturing facilities at Coimbatore, West Asia and China. It has also announced an investment of Rs 450-500 crore on facilities for the manufacture of boilers for thermal power projects for which it signed a JV agreement with Mitsubishi Heavy Industries of Japan in November 2006.

Naik and his team are categorical that they will not list any JV, of which L&T has several in the engineering space. "Engineering constitutes only 5 per cent of the overall EPC business, but it is an important enabler for our turnkey projects," says the L&T chief. L&T Chiyoda, L&T Sargent-Lundy and L&T Valdel are some of the JVs the company has in the hydrocarbons, power and oil & gas sectors.

At a time when everyone and his uncle in India Inc is headed abroad, it comes as no surprise that L&T, too, is spreading its wings to foreign shores. It has set up subsidiaries in Oman, Saudi Arabia, Qatar and Kuwait, mainly to capture a slice of the mega construction boom in West Asia. These, too, are paying handsome dividends, albeit, from a small base. In the nine months ended December 31, 2006, L&T's international subsidiaries and associate companies reported a 230 per cent surge in net profit to Rs 56 crore (Rs 17 crore) on a 67.5 per cent rise in total income to Rs 789 crore (Rs 471 crore). L&T Oman and L&T Saudi Arabia, which operate in the EPC space, L&T Electromech, which operates in the electrical & instrumentation space in the oil and gas sector, and L&T International FZE, which is involved in commodities hedging, are the biggest components of its global operations and account for 84 per cent of the total income reported by the international S&A companies. Says Agarwal: "The international ventures are still very small and account for a mere 3-4 per cent of the group's turnover." Together, these four are valued at Rs 1,425 crore. "Over the next 3-4 years, these companies will begin to make a meaningful (read: over $1 billion, or Rs 4,100 crore) contribution to our revenues," says Naik.

Is there, then, a chance that sometime in future, one or more of the subsidiaries will actually outshine the parent? It's still too early to call, but "by 2015 we will list 10 of our subsidiaries on the bourses," says J.P. Nayak, Whole-time Director & President (Machinery & Industrial Products), L&T. If you're a betting man (or woman), you could do worse than back one or more of these 10. And L&T, by then, will have emerged as a conglomerate straddling almost every point of the corporate value chain.