Business Scaling

Why Sanjiv Puri needs to take a leaf out of A.M. Naik’s book to scale up ITC’s IT business


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Why Sanjiv Puri needs to take a leaf out of A.M. Naik’s book to scale up ITC’s IT business



Many relate Anil Manibhai Naik with having built Larsen and Toubro, the country’s largest construction and engineering firm.


It is a pity that Naik does not get credit for building a successful IT services business that now accounts for half of the conglomerate’s profit.


Naik’s feat is remarkable because Indian conglomerates’ success with building an information technology services business is patchy. Agreed, Tata Sons has made the strongest IT services brand in Tata Consultancy Services Ltd and Mahindra Group built the country’s fifth-largest technology services business in Tech Mahindra Ltd.




But other big businesses, including RPG Group (Zensar) and CK Birla Group (Birlasoft), have not met with the same success.


ITC Ltd, the diversified conglomerate whose business stretches from cigarettes to hotels, also has a tech presence. But more than 22 years after ITC Infotech was founded, shareholders and analysts continue to scratch their heads on the road ahead for this business.



The 41st edition of Twich+ asks this question if ITC needs to take a leaf out of Naik’s book to scale up its technology business?


Both ITC and L&T are among the country’s oldest conglomerates. ITC started as Imperial Tobacco Company in 1910 before it changed its name in 1974; L&T was founded in 1938.


L&T set up L&T Infotech in 1996 (The second IT arm, L&T Technology Services, came up in 2012).


ITC Infotech was founded in 2000.


For about two decades, beyond the constant churn of CEOs, nothing much moved at L&T Infotech. During this time, the company experimented with a CEO, a joint CEO and even not having a CEO as the privately held firm looked to find its feet.



At the height of the software boom in the early 2000s, he used to bemoan college graduates choosing computer science over mechanical or electric engineering. This was true because coders stood to earn more and a career as a software engineer also came with the promise of a comfortable life in the US.



But Naik is anything but a Luddite.



In 2009, when Satyam Computer System’s founder B. Ramalinga Raju admitted to fixing the company’s books, New Delhi appointed a three-member board to find a buyer for the Hyderabad-based firm.


L&T swiftly bought shares of Satyam from the open market and built a small stake. Then on the day of the auction in April 2009, it appeared Naik would finally get the prized asset.


But by noon that day, the core team of L&T left the Taj President Hotel in south Mumbai, dejected, even before the result of the auction process was formally announced.


L&T’s offer of Rs 49.9 a share was lower than the winning bid of Rs 58 a share made by Mahindra to buy Satyam.



Naik was hurt. But he did not give up.



A decade later, L&T completed a hostile takeover of Mindtree Ltd in 2019.



But before that, the conglomerate did something that was arguably Naik’s most significant contribution to its IT business.


Naik hired former Infosys executive Sanjay Jalona in 2015 to run L&T Infotech. Jalona put together a senior management team that helped the company scale up business and subsequently went public (L&T Infotech went public in July 2016 followed by L&T Technology Services in September of that year).


L&T Infotech’s revenue jumped from Rs 1,333.2 crore ($208.5 million) in the April-June quarter of 2015 to Rs 4,836.7 crore ($601 million) during the July-September period of 2022.


Earlier this year, Jalona moved out of the company after L&T decided to merge L&T Infotech with Mindtree Ltd and entrusted Debashis Chatterjee to steer the combined business.



Contrast this with how ITC has moved.


Sanjiv Puri took over as chief executive officer at ITC in 2017 and subsequently took over as chairman two years later after his predecessor Yogesh Deveshwar passed away.


Not many outside the company know that Puri, who joined ITC in 1986, served as the managing director of the wholly owned subsidiary between 2006 and 2009.


One would have expected that a stint overseeing the technology business would have pushed Puri, a mechanical engineer from the Indian Institute of Technology, Kanpur, to tap the public markets.


Beyond making grandiose statements in ITC’s first half-a-day interaction with analysts in December last year, the management has disappointed investors.


It is baffling why ITC Infotech remains private.


Unlike its hotels or fast-moving consumer goods business, the IT services business does not require much cash infusion. ITC Infotech’s profitability is second only to the tobacco business among all the conglomerate’s businesses.


Like Naik, Puri, too, managed to get another former Infosys executive, Sudip Singh, 2019 to run ITC Infotech.


But ITC Infotech continues to shy away from disclosing many relevant metrics. The 36-page disclosure by the company only reveals its revenue, expenses and profits. There is no commentary or numbers on how many clients or industry segments or from countries its gets business. Above all, we still don’t know what ITC Infotech does: Is it merely in the business of providing back-office tech support or does ITC Infotech offers platform-based solutions?


Based on available information, ITC Infotech is small. Its revenue grew from Rs 2,469.2 crore in the year ended March 2021 to Rs 2,884.3 crore last year, a 16.8% increase. This was less than the growth of the country’s five largest IT companies.


Considering India’s outsourcing sector reported a 15.5% growth last year, according to industry body Nasscom, ITC Infotech’s performance is not spectacular.


ITC Infotech got Rs 176.8 crore or about 6.2% of its total revenue from parent ITC. Contrast this with TCS, which gets Rs 4,207 crore or 2.2% of total revenue from businesses owned by parent Tata Sons.


The tech business’s profit totalled Rs 541 crore last year as against Rs 451.3 crore in the year that ended March 2021. Although the company does not share any financials, this implies that ITC Infotech’s net profit margin totalled 18.7%.


This is respectable (Infosys’s net margin was 16.4% at the end of the September quarter).


The question on ITC investors’ minds is whether the company is looking to go public any time soon.


For now, a bigger challenge for a company of the scale of ITC Infotech is the looming fear of a recession. A slowdown puts smaller companies at a disadvantage compared to the big boys. Fortune 500 companies typically split the tech work between large and small firms. Typically, customers look to save money in challenging times and seek price discounts from their vendors. This often leads to larger companies edging out smaller firms as part of IT vendor consolidation.


Here again, a combined Mindtree and L&T Infotech is better placed, a point reaffirmed by the CEO Debashis Chatterjee to your writer recently.


L&T Infotech and Mindtree, together, had Rs 8,237.1 crore in revenue in the quarter ended 30 September. For now, the conglomerate wants to run L&T Technology Services, which did Rs 1,995 crore business in the latest quarter, separately.


Naik’s grit and persistence helped L&T build an IT business that is now only a shade less than Tech Mahindra.


It remains to be seen which business from the ITC fold will get listed first. But the Kolkata-based business house may do more damage to its IT business and its shareholders the longer it keeps ITC Infotech in the shadows.

https://www.livemint.com/mint-top-newsletter/twichplus03112022.html

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