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Kripa Raman

Mumbai , Feb. 23

THERE are many who look upon outsourcing of engineering services as the next golden goose for software companies. It is indeed turning out to be so for Larsen & Toubro, the country's largest engineering company.

L&T has identified embedded software and product engineering services as "strategic activities" that will serve a twin purpose.

For one, L&T would be less of a plunder-house for those software service companies which are on the look out for engineers with domain expertise.

More importantly, this business has the potential to mitigate income risks from project execution, which forms the bulk of the company's business today.

"If you look at L&T, post-demerger of its cement division, a large part of its business consists of projects — either EPC or construction projects," said Mr Y. M. Deosthalee, Chief Financial Officer, L&T.

"In the projects business, revenues as well as profitability are not evenly spread out, and volatility in earnings is very high. It would depend on when projects are received, the stage of completion, when they reach the threshold level... Only then will one start realising margins."

The second issue is that projects are getting more complex, he said. "Project sizes are becoming bigger and bigger, and naturally the risk involved is also higher.

"From the point of view of improving earnings and managing risks better, we want to grow in services."

Pure engineering services would mean any design and development activity that does not involve actual EPC work.

L&T's portfolio of services would include information technology, already being handled by its subsidiary L&T Infotech; and embedded software, product and project engineering, which will be handled by L&T itself.

Almost all the large software houses have already stepped into this space. This is not to mention Indian companies exclusively in the CAD/CAM and engineering services area. Several multinationals too have set up captive engineering design services centres in India.

"But our advantage is that we are basically an engineering company and the customer would see it clearly as a big advantage," said Mr Deosthalee. "Software coding can be developed easily, but domain expertise is scarce and that is what we have."

Currently, the pure services activity fetches the company annual revenues of around $50 million, "It is very small, but we are growing at about 70 per cent annually. L&T also does some services work through its joint ventures L&T Sargent & Lundy Ltd and L&T Ramboll Consulting Engineers Ltd."

"Again, it is a completely international business, like software. We have a number of good customers. It is in the growth mode. In terms of volume it is not very high since it is still in the nascent stage. But we believe that in the next two to three years it will take off significantly."

L&T would be looking at the higher end of the engineering services spectrum — design of aircraft parts, automobile parts, construction equipment, and the like. In the embedded software space, L&T would look at designing software for products.

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