L&T's shopping spree

Way back in 1992, H.V. Seetharam, a senior sales manager with Larsen & Toubro’s (L&T’s) switchgear division, approached the Coimbatore-headquartered Salzer Electronics with an offer to market its electrical equipment that is used in making switchgears. Salzer agreed and, over the following years, the relationship blossomed. In 2006, Sharad Kulkarni, a general manager in the switchgear division, approached Salzer with an offer to buy a stake in it. Salzer didn’t need the money, but saw other advantages in the offer.

It sold a 14 per cent stake to L&T Capital and raised Rs 8.8 crore. By buying a stake, L&T was expressing its confidence in Salzer, something that wasn’t quite coming through from many of its other vendors. “L&T is not comfortable with vendors that are not closely associated with them,” explains Rajesh Doraiswamy, Joint Managing Director, Salzer Electronics.

The alliance with Salzer didn’t end there. Kulkarni once again approached its management, this time with a proposal that it make cables for L&T. The Salzer top brass saw this as an opportunity as it wasn’t into cables till then. It lost no time in floating, in 2007, a subsidiary, Salzer Cables, in which L&T Capital picked up a 49 per cent stake. By October of that year, the plant began production. It’s win-win for both L&T and Salzer.

That’s the way L&T does it—buy into vendors, and build solid partnerships with them. Most of these alliances—which don’t qualify as acquisitions since L&T doesn’t breach the 15 per cent threshold which would trigger an open offer—have been struck only in the past three years. And increases in stake have taken place step by step. For good reason.

In 2006, when the economy was booming and the construction and capital goods sectors were at the top of their game, the L&T management discovered that some of its vendors were operating at full capacity. That’s doubtless great for the vendors but L&T’s apprehension was that critical components it needed could run into short supply. Excess demand could also trigger issues of quality control.

Around 2006 was also when L&T decided to spread its wings into new areas like defence, railways and shipbuilding. To quickly scale up these businesses it needed, amongst other things, commitments of assured supply from its key vendors. That’s when L&T chief A.M. Naik and his core team reckoned that buying stakes in niche companies operating in infrastructure- related businesses would make immense sense. Result? Over the next few years, various subsidiaries of the engineering and construction giant bought stakes in firms—listed and unlisted—that operate in sectors like railways, defence, infrastructure development, construction and power.

“These are vendors who are critical to L&T’s fortunes, and hence we have taken stakes in them to strengthen such relationships,” points out Y.M. Deosthalee, Chief Financial Officer, L&T, and Chairman, L&T Finance, which is one of the subsidiaries involved in the exercise of buying strategic stakes.

The big imponderable, of course, is how ‘strategic’ are some of these purchases; do L&T’s ambitions stop at the vendor-relationship level, or would it consider going the whole hog and acquiring a majority stake in any one of these companies? Consider Kalindee Rail Nirman (Engineers), for instance, which executes signalling & telecom and gauge conversion projects for the railways. L&T’s stake in this company, via subsidiary L&T Capital Co, is precariously close to the 15 per cent threshold, at 14.9 per cent.

L&T, meantime, has been sharpening its focus on the railways, and in the recent past has bagged major orders in track-laying and electrification. An acquisition of Kalindee will prove a perfect fit, and also assist a quick ramp-up in this relatively new business. Kalindee Director Arvind Gemini declined to comment on the matter to BT. The promoters hold a 17 per cent stake in Kalindee, which would make L&T’s task of becoming the single-largest shareholder in the New Delhiheadquartered company easier.

Another company that may be on L&T’s radar is Astra Microwave Products, in which L&T Capital has purchased just under 10 per cent. Astra Microwave designs and makes components and sub-systems that are used in defence—a sector in which L&T has plenty going for itself, having single-handedly developed weapon platforms and naval systems & equipments.

Deosthalee would prefer not to talk about specific companies, but he doesn’t rule out such strategic acquisitions. But they hinge on three conditions: The timing, the vendor and valuation. “If valuations change (get expensive), then it may not be an option,” adds the L&T CFO. That companies like Kalindee and Astra Microwave are one of a kind and majors in highly specialised sectors like railways and defence would make them logical fits into L&T, point out analysts. “It is difficult to get into niche areas like defence equipment,” says Ajay Parmar, Head of Research, Emkay Global Financial Services. He adds that it takes a minimum of two years for a particular vendor to get approval from the respective defence department for a product, irrespective of its size.

Should the managements of the companies under L&T’s apparent acquisitive lens be worried? B. Malla Reddy, Managing Director, Astra Microwave, shrugs off the fact that L&T Capital has been raising its stake progressively over the past four quarters. “I’m not paying much attention. I see it like any other investment,” says Reddy. He adds that no L&T official has approached him for an alliance.

Not everyone is so nonchalant about L&T’s prowling around. Take, for instance, unlisted infrastructure consultancy Feedback Ventures, in which L&T Capital has pocketed a 26 per cent holding. “It’s a strategic fit for us,” says Vinayak Chatterjee, Chairman, Feedback Ventures. He adds that the L&T stake gives the company a high degree of confidence. Industry players point out that L&T is one of the biggest customers for Feedback Ventures.

Rather curiously, L&T has also acquired just under 5 per cent in two private banks. Does L&T, which has a non-banking finance company (NBFC) in L&T Finance, expect banking regulations to be liberalised in the near future, which would allow for corporations to have banking operations? That may be jumping the gun a bit.

Deosthalee explains that it’s only about exploiting existing synergies and not much more. Here’s how: L&T’s NBFC finances purchases of construction equipment; buyers of such equipment need services like bank guarantees, and personal loans for this purpose. That’s where the banks come into the picture. “Our objective is to have a complete offering and exploit the synergies,” says Deosthalee. By buying stakes in three southern banks—City Union, Federal and Catholic Syrian—L&T is in a position to guarantee customers services it can’t otherwise provide— like working capital and bank guarantees.

Seven months ago, when L&T acquired 8.3 per cent in Satyam Computer Services (now Mahindra Satyam), its desire for inorganic growth was palpable. Today, Satyam has been transformed into a lucrative portfolio investment, and a clutch of other investments made—which earlier had innocent financial hues— have assumed strategic proportions. The fireworks may begin sooner than later.