Mumbai/Bengaluru The merger of Mindtree Ltd with L&T Infotech Ltd (LTI) was announced after the market closed on Friday. The merged entity, LTIMindtree Ltd, has become the sixth largest listed IT services provider in India with revenues of $3.5 billion.
The consortium is expected to benefit massively and is likely to expand across scope and geographies. The merged entity’s ability to get big deals also gets better. LTI’s strength in banking, financial services and insurance (BFSI) and Mindtree’s strength in communications, media and technology will mean a more diversified offering. LTIMindtree will also benefit from synergies in both revenue and cost, management said in a call. This will help expand operating margins over the long term and help LTIMindtree achieve industry-leading growth. Analysts are largely positive on the deal but are cautioning about some initial troubles. Analysts at Emkay Global Financial Services Ltd said, “Given the risk of employee layoffs and the impact on execution and delivery, there is a potential for near-term business and growth disruption.”
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This merger will be completed in 9-12 months. Till then both LTI and Mindtree will operate independently. Their respective FY23 growth guidance remains unchanged and management remains confident of achieving the targets. Meanwhile, a steering committee will be formed to monitor the infection. “The proposed amalgamation will be an overhang in the short term due to the risk of leadership changes and some disruptions in operations,” said analysts at Emkay.
Unlike other large mergers, the alignment of work cultures is not expected to be a major challenge given their common parent, but the exit of LTI Chief Executive Officer Sanjay Jalona could cause some near-term volatility in LTI stock. . Analysts said Jalona is seen as a driving force behind LTI’s rapid growth since its listing and that his resignation is a loss.
“Jalona’s exit could be a short-term concern. That said, there is synergy on the cost front and it will eventually become somewhat easier for the merged entity to retain talent,” said Piyush Pandey, analyst at Yes Securities Ltd.
In FY22, LTI and Mindtree outperformed most of their Tier-I competitors on revenue growth. Investors rewarded excellent earnings performance. Shares of LTI and Mindtree have gained 20.5% and 50.1%, respectively, in the last one year. It is no wonder then that LTI and Mindtree have FY24 valuations at par with TCS and at a premium to Infosys, Wipro and HCL Technologies. According to Bloomberg data, the FY24 LTI and Mindtree have a price-to-earnings multiplier of around 25x. Meanwhile, the swap ratio of 73 LTI shares for every 100 Mindtree shares is neutral for both the companies at the current share price, analysts at Motilal Oswal Financial Services said in a report on May 8. After the merger, parent Larsen & Toubro will hold 68.73 per cent stake in the company. Based on FY22 data, LTIMindtree’s profit after tax was approximately $530 million, cash and investments was approximately $1 billion, and headcount was approximately 82,000.
Until the benefits of this merger are visible, analysts are in wait and watch mode. Therefore, Emkay Global has currently kept the ratings of both the stocks under review. Analysts at Motilal Oswal said: “We maintain our neutral ratings on both the stocks as we see near-term risks offset the long-term opportunity gained from the larger entity. We see that share prices are largely factoring in a supportive demand environment.”