L&T open to spend $1 bn on IT buyouts

Larsen & Toubro, the country'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, L&T's Mumbai-based chief financial officer, said in an interview. The company might spend between $100 million and $1 billion, he said, without being more specific.

L&T, which lost a bid to buy Satyam Computer Services, the company at the centre 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 per cent this year, led by cuts at US companies, researcher Gartner 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, 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 Rs 11,200 ($1.77 billion).

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 reorganisation to boost growth. L&T Infotech will be the second L&T unit to be listed after L&T Finance Holdings, the financial services arm, went public in 2011.

L&T 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 13 May. "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 per cent from its IPO price of Rs 52 apiece in August 2011, giving it a market capitalisation of $1.7 billion. Larsen holds a 72.9 per cent stake in the company, data compiled by Bloomberg show. L&T's shares rose 1.3 per cent to Rs 1,612.35 in Mumbai trading.

L&T Infotech, which has 20,000 employees, counts Chevron, Hitachi and Lafarge among its clients, according to its website.

The company acquired a unit of Otis Elevator in October last year for an undisclosed sum. L&T lost its bid to acquire Satyam Computer Services to Tech Mahindra.

Infosys, the country'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.

Infosys, the country'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.