SN Subrahmanyan, CEO of Larsen & Toubro, says that with the sale of the company’s electrical and automation business to Schneider Electric consortium for ₹14,000 crore, the company has exited its only products business so that it can focus on its core competencies in construction and engineering. In an interview with Rachita Prasad, Subrahmanyan said L&T would continue to evaluate businesses and divest non-core operations when needed.
The talks to sell E&A business started way back in 2010-11. What convinced you this time that the timing was appropriate and Schneider was the right buyer?
E&A division has been among the biggest businesses of L&T for nearly five decades. It may not be as dominant as before but it is one brand which is known across the length and breadth of India. Schneider is a $30-billion multinational with one of the best product ranges. When a company like that shows interest, you tend to look at the proposition seriously. Even if Schneider invests 1% of revenue on research and development (R&D), the amount will be $300 million, which is around ₹2,000 crore. For us, the turnover of this particular business is around ₹5,000 crore and even if we invested 1-2% on R&D, it would be only ₹50 crore-₹100 crore. Given how the world is changing, new products are being added and innovation is taking place, you can’t run a business in the same manner as one has been doing it without spending more time or money. Schneider’s offer was justifiable from our point of view on how the business can be taken forward and that’s why we went ahead and signed the deal.
L&T Exited Products Business to Focus on Engineering
How does the staff movement take place after the deal? What happens to the brands used by the products?
E&A division has roughly 3,500 staff who would be transferred to Schneider as this is a slump sale of the whole business unit. The brand used by the division will be transferred to the new owner and they can use it for the next five years if they choose to do so.
E&A was the only products business L&T had. How would the sale impact the overall revenue, margins and objective of the company?
E&A business has sales of about ₹5,000 crore, which is around 4.5% of L&T’s total sales and commensurate profit. The way L&T is growing, we will be able to take this forward and overall it should be ok. The division has margins commensurate with the rest of the business, margins were not significantly different. Therefore, the deal would not make any difference to the weighted average profitability of the company. L&T now becomes an infrastructure construction and engineering company, primarily focusing on EPC (engineering, procurement and construction), heavy engineering, and defence. That’s what we want to focus on and become and this deal is a step in that direction.
What are the other divestments you may do?
Some businesses have come to a point where we feel they are too matured and we cannot do more with them. Then we look at unlocking value in them. I don’t think at the moment we are looking at other things. There will be a continuous thought process on some of the investments and businesses that we have today but nothing in the pipeline.
What do you plan to do with the deal proceeds?
We will go about it in a calibrated manner. At the moment, only the agreement has been signed which has to go through the regulatory process and get all the approvals. The transaction will take 10-14 months to close. We will take a considered call on what has to be done with the financial proceeds when that’s done and it is still some time away.
L&T has said that it will look at M&A opportunities in Information Technology services sector to fill technological gaps. Could this money help your prepare a war chest for that?
Our IT businesses are doing well at the moment and growing. If there is any last minute transaction or any opportunity we will look at that but right now it is business as usual.