L&T Infotech will grow in line with industry in FY17: A M Naik

A M Naik, in a free-wheeling chat with Sheetal Agarwal explains the company's future plans while addressing some of these concerns

L&T Infotech's initial public offering (IPO) has generated mixed reviews from media and analysts. The company’s lower growth versus peers and higher client concentration are some concerns.

Anil Manibhai Naik, executive chairman of L&T Group, in a chat with Sheetal Agarwal explains the company's plans. Edited excerpts:
 

What is the differentiation and competitive advantage of L&T Infotech vis-a-vis peers?

A big one is L&T itself. There is tremendous information technology-to-business connect and tremendous wealth of knowledge within our companies. At L&T, we make nuclear submarines and reactor, aerospace, smart cities, etc. This domain expertise and experience is the differentiator between L&T Infotech and the rest. No other player can do physical and digital together. The IT-to-business connect is an opportunity wherein our clients get to be a full-scale laboratory in the backyard, where new technologies are tried and tested with the help of L&T Infotech, giving them the edge of getting the experience faster than anyone else. Second, unlike other IT companies that position themselves as suppliers/vendors, we position ourselves as partners or associates. Third, we have all the resources other peer group IT companies have.

In 2014, we sold the $85-million business to L&T Technology Services, our engineering services subsidiary. Otherwise, we would have had revenue of $990 million by now. But, we go to the market together, because we don’t want to look like a sub-$1 billion IT company, when in fact our revenues are at $1.5 billion on a combined basis. We have created two separate companies because engineering is the No 1 brand of L&T and we want to be counted as first among equals.

The banking, financial services and insurance sector forms 47 per cent of your revenues and there is a client overlap with other IT companies as well. What is L&T Infotech’s strength there?

L&T Infotech has revenues worth $126 million from Citibank and we are the fourth biggest vendor although there are nine companies in all. We are as big if not bigger than other top-ranked peers except those who have made acquisitions of Citibank-owned units (according to market sources, these are Tata Consultancy Services and Wipro). So, while you may have a good banking relationship here, which gives you an entry - the L&T connect - you have to do really well to be able to grow to $126 million and being ahead of many others.

Why has L&T Infotech’s dollar revenue growth lagged peers in the past two years?

We transferred $85 million business to L&T Technology Services. So, investors should see us as a $975-million revenue company.

During the past two years, our high exposure to oil & gas has impacted revenue growth. Our energy, oil & gas revenues have come down from 22 per cent two years ago to 12 per cent. This is because of falling crude oil prices. Now, oil companies have realised this is the new norm and crude won’t go to $100 a barrel anytime soon. Recently, IT budgets have started getting reallocated and discussions have started. In the past three quarters, the slide has stopped. We have also started focusing on downstream and midstream companies as lower crude prices help them. The drag of oil & gas on our revenue growth has abated.

This year, do you expect to grow in line with the IT sector?

We think we will be in line with the industry, if not more.

What is the growth outlook for L&T Infotech?

In the next three to four years, we intend to double L&T Infotech’s revenues organically. Our target is to take it to $1.4-1.5 billion organically, while another $400-500 million is expected to come from acquisitions. We shall look at acquisitions only after the organisation has completed digesting the IPO, which means only in FY18. We might look at smaller sized companies in the $20-50 million revenue bracket.

Where will the growth come from?

There are two focus areas. First, we want to reduce our US revenues proportionately from 68 per cent to about 60 per cent in the near future. In Europe (17 per cent of revenues), we see a lot of potential for growth.

We are putting a very strong management team in place to take it to 25 per cent. Second, on the technological front, we have a plan to grow all the digital businesses. As of now, we are 1.5 to two years behind the leaders but catching up fast.

Catching up rapidly is possible because the whole world is evolving to completely new technologies. All our efforts are in this direction, but only time will tell!

Top 10 clients’ revenue concentration is much higher at L&T Infotech than peers. Do you plan to reduce this?

Our relationships are very strong, solid and long-term. So far we have concentrated on top 20 accounts, which form 68 per cent of our revenues. They have been growing faster than the company. There is an opportunity to further mine other 230 odd accounts in the manner in which we ideally want to! Simply because these companies are also very big! This year, we have extended our focus from top 20 to top 50 clients.

A key concern that analysts have is that a significant portion of your profit comes from treasury which is more volatile in nature. What is your strategy there?

We, at L&T Group, manage treasury operations relatively better than many others. While analysts are concerned about the continuity of treasury gains, our long-term hedging strategy insulates our margins from the uncertainties of FX fluctuations. In terms of our average hedging rate, we are quite comfortably placed and we believe we shall make money on treasury because we do long-term hedging.

What is L&T Infotech’s EBITDA margin excluding the discontinued operations?

In the offer document, we have disclosed whatever regulatory norms require us to do. However, there are a lot of common expenses for the same set of people with the same overheads - this makes segregation (in terms of resources and time spent, etc.) very difficult. The discontinued operations were never more than 10 per cent of our overall business. Granting the margins (EBITDA) on that 10 per cent of the overall business, the overall difference in totality could be just around 10-20 basis points on either side - which is a relatively small variation.