We, at Larsen and Toubro (L&T), have spoken time and again on how we would like to take the company forward. Over the last decade, a big portion of the company’s earnings have come from the engineering, procurement and the construction (EPC) vertical, including projects, manufacturing and services. Much of the investments that needed to be incurred on the manufacturing side of the business have already been incurred. What is now required is to spread the assets and see how we can generate adequate returns from the overall investments incurred, from the shareholders point of view.
Though the EPC and projects side of our business is the bulk of our portfolio, it is also the riskier part of our portfolio. It entails contracts that are tough to execute and much of L&T’s staff and stakeholders, including our work men are used to sweating it out to see that we do our best to put up these momentous projects, which are some of the largest of its kind, both in India and other parts of the world. The profit after tax margin from these businesses have been in the range of around 6-7%.
The company’s board of directors and our chairman have been advising us to look for opportunities on the services side. This is also the direction in which the management of the company is looking towards. Over the last few years, we have given meaningful fillip, management interest and a concerted push to our services business, mainly comprising L&T Infotech (LTI), L&T Technology Services (LTS) and L&T Finance. Also, in our thinking, our real estate business is also a services business. These businesses have grown well over the last few years and full credit goes to their respective management teams. These businesses have also been able to leverage the strengths of L&T as a strong parent to these businesses.
These businesses are, due to their inherent nature, are more profitable and see a net profit margin of around 15-16%. The contracts in these businesses are less risky and, overall, it makes sense to grow these businesses a little faster than our other businesses.
A few years back, the management of the company that we are looking at now – Mindtree, approached us. We were not particularly interested in the proposition at that time, for various reasons. We were concentrating on incurring heavy capex on the manufacturing side of our business and were internally working on management succession planning. Recently, about three months back, V.G. Siddhartha, the promoter of Café Coffee Day, and one of the significant shareholders of Mindtree approached us and asked us whether we would be interested in looking to acquire his 20.32% shareholding in Mindtree. As a conservative company, our immediate reaction was neutral and we continued to engage in a dialogue with him. Siddhartha has been a shareholder in Mindtree for around 19 years and has a lot of emotions surrounding his investment in the company, and a sense of pride in what Mindtree has been able to achieve over this period.
Consequently, as he thought about divesting his stake in Mindtree, he wanted to house it with a set of people and a business group that would look at the business the same way as he did – through the lens of governance values, business ethics, and long-term value creation. After about three or four meetings, we decided to go ahead with the transaction. From our point of view, we looked at this as an opportunity that made enormous business sense for us from the point of view of bolstering our IT services portfolio. From what we understood, if we didn’t to buy Siddhartha’s stake, he would have anyway sold it to someone else as he was intent on selling his shareholding in Mindtree due to his own reasons.
L&T Infotech is predominant in the banking, manufacturing, oil and gas, and insurance businesses, whereas Mindtree is into consumer packaged goods, retail, hospitality, travel and technology.
We have, as could be expected of us, also had dialogues with Mindtree’s management. Senior people in the company’s management are personal friends, good people of repute who have done their best to get Mindtree to where it is today and, therefore, we feel a lot of positivity as we move forward. Obviously, when existing promoters/founders of a company find that one of them wants to place his shareholding with someone else, there can be emotions and trepidations involved, which are visible in this case. But business is business. Emotions do play a part, but they have to be overcome as we go forward. We are approaching this entire transaction from the point of view of ‘pyaar’ (love) and ‘dil’ (heart).
We look at all our businesses as independent businesses. We even call our business verticals ICs (individual companies). These individual ICs, verticals, subsidiaries, and associate companies are run independently by the chief executives concerned. Some of them are listed and have their own boards where decisions are made. We, at best, play a supervisory role a the board level and give these individual companies some connect with the parent, which is L&T, our insights and value additions, which they can leverage.
I would like to take this opportunity to reassure Mindtree, its promoters, board of directors, employees and stakeholders that this (L&T) is an 80-year-old company, which has the highest governance values. We did a survey and found that 35% of L&T’s 113,000 employees have been in the company’s service for the last 25-30 years.
Mindtree, with our investment therein, will be run as an independent company, with its board and its management. L&T, at best, will provide board oversight, management connect, value addition, and other benefits. We feel Mindtree will be a good addition to L&T’s overall portfolio. We hope, believe and trust that the Mindtree management, its board, stakeholders and employees will take our intent positively. L&T is probably the best home for them in the country.
The author is chief executive officer and managing director, Larsen and Toubro