L&T's infrastructure business loses ground to IT & technology segment

Larsen & Toubro, one of India’s biggest conglomerates, still describes itself as an engineering and infrastructure company but the Mumbai-based company is largely dependent on its IT & technology services subsidiaries such as L&T Infotech, L&T Technology, and Mindtree to grow its revenues and profits.

Infrastructure segment revenues have been stagnant for close to five years now and it is the same for the company’s traditional businesses such as hydrocarbon projects, power, development projects, heavy engineering, and financial services (see the adjoining chart).

The defence engineering business has grown slightly in recent years, but it accounts for 2.4 per cent of L&T consolidated revenues and remains too small to move the needle at the consolidated level.

The company’s IT and tech subsidiaries accounted for 45.3 per cent of the company’s consolidated profit before interest and taxes (PBIT) in the first half of FY22, up from 33.4 per cent in FY21 and just 17.4 per cent in FY18 (see the adjoining chart).

The IT segment reported PBIT of Rs 2,919.5 crore in H1FY22, up year-on-year against Rs 1,528.6 crore and Rs 1,992.7 crore reported by infrastructure and other segments, respectively.

The IT & technology segment has accounted for the entire growth in L&T consolidated PBIT since FY17. The company’s non-IT segment reported PBIT of Rs 3,521 crore in H1FY22, which will translate into the lowest annualised PBIT for the segment in at least a decade.

In comparison, the company’s core business of infrastructure accounted for less than a quarter (23.7 per cent) of consolidated PBIT in H1FY22, down from 31.3 per cent in FY21 and nearly 50 per cent in FY17.

Its other segments such as hydrocarbon projects, heavy engineering, power, developmental projects, defence engineering, and financial services together accounted for 30.9 per cent of L&T consolidated PBIT, down from 35.2 per cent in FY21 and 46.1 per cent in FY19.

Similarly, there has been a rapid rise in the contribution of IT and technology in L&T’s consolidated revenues.

The IT & technology division revenues are up three times in the past five years from Rs 9,887 crore in FY17 to Rs 15,145 crore in H1FY22, which translates into annualised revenues of Rs 30,290 crore for FY22. In contrast, the infrastructure segment reported revenues of Rs 24,700 crore in H1FY22 (or Rs 49,940 crore annualised in FY22), down 8 per cent from Rs 53,921 crore in FY17. It is the same with its other segment whose combined annual revenues continue to stagnant at around Rs 50,000 crore.

Analysts do not expect the segment to change significantly in the next few quarters at least, given the poor capex growth in India, which has adversely affected the L&T order book.

“The macroeconomic parameters have begun favouring private capex although likely ordering is expected only in FY23,” write analysts at Motilal Oswal Financial Services in their recent report on L&T results for H1FY22.

Analysts at Emkay Global Financial Services write: “Although awarding activity has come down (22 per cent y-o-y) due to the pandemic impact and slower disbursals from the central government, tendering activity remains stronger than ever, with the overall business pipeline for H2FY22 up around 12 per cent y-o-y.”

However, even at projected 12 per cent growth in the second half, infrastructure is still likely to underperform the IT & technology segment, which is growing in double digits. This explains why the rise in the L&T share price and market capitalisation is almost entirely tied to the movement in the share price of its IT & technology subsidiaries.

The company’s market capitalisation is up 37 per cent or Rs 67,500 crore year-to-date in 2021 against a 108 per cent rise (or Rs 1.25 trillion) in the market capitalisation of its three tech subsidiaries.