Biggest Indian Engineering Company Considering IT Buyouts

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Larsen & Toubro Ltd., India’s biggest engineering company, is open to spending as much as $1 billion on acquisitions for its software-services unit as the subsidiary prepares for an initial public offering.

Buying companies will help L&T Infotech build scale and compete with larger rivals, R Shankar Raman, Larsen’s Mumbai-based chief financial officer, said in an interview. The company may spend between $100 million and $1 billion, he said, without being more specific.

Larsen, which lost a bid to buy Satyam Computer Services Ltd., the company at the center of India’s biggest corporate fraud, and local software developers are turning to acquisitions to boost revenue amid estimates demand for their services will fall. Worldwide spending on information-technology services is projected to shrink 0.7 percent this year, led by cuts at U.S. companies, researcher Gartner Inc. forecast on April 9.

“A listing of the infotech business would help unlock value for the parent,” said Abhineet Anand, an analyst at Quant Broking Pvt., who has valued the unit at about $1.5 billion to $2 billion. “They would list the unit when it has scaled up to a level that can get better valuations.”

While a listing will provide additional funds, L&T Infotech needn’t hold back deals for it, Raman said, adding that an acquisition can also be funded by parent Larsen, which, according to data compiled by Bloomberg, has cash and cash equivalents of 112 billion rupees ($1.77 billion).

Won’t Sell

Set up in 1938 by two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro, L&T in 2011 split into different business units and subsidiaries as part of a reorganization to boost growth. L&T Infotech will be the second Larsen unit to be listed after L&T Finance Holdings Ltd., the financial services arm, went public in 2011.

Larsen won’t sell the information technology unit, which has an annual revenue of close to $1 billion, according to Raman. The division is it’s third-largest unit by revenue.

“It’s an area that we need to mastermind and grow,” Raman said in Bloomberg’s Mumbai office on May 13. “Listing Infotech would be also a currency for growth. It seems to be the logical step for the company.”

L&T Finance’s stock has climbed 26 percent from its IPO price of 52 rupees apiece in August 2011, giving it a market capitalization of $1.7 billion. Larsen holds a 72.9 percent stake in the company, data compiled by Bloomberg show. Larsen’s shares rose 1.3 percent to 1,612.35 rupees in Mumbai trading.

Chevron, Hitachi

L&T Infotech, which has 20,000 employees, counts Chevron Corp., Hitachi Ltd. and Lafarge SA among its clients, according to its website. The company acquired a unit of Otis Elevator Co. in October last year for an undisclosed sum. Larsen lost its bid to acquire Satyam Computer Services to Tech Mahindra Ltd.

Infosys Ltd., India’s second-biggest software exporter, said this month it plans to step up acquisitions and venture-capital investments in a bid to more than double sales to $20 billion by 2020. Larger rival Tata Consultancy Services Ltd. is eyeing possible acquisitions in Europe to expand its presence and may also look at adding businesses in the U.S., Chief Executive Officer N. Chandrasekaran said in October.

(Updates with closing share price in ninth paragraph.)
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