Holding on to the remaining top-level employees is crucial to limiting the disruption in the business (Mint file)
Holding on to the remaining top-level employees is crucial to limiting the disruption in the business (Mint file)

Mindtree investors get cold feet as promoters check out, L&T checks in

  • Mindtree shares now trade at 769, 22% lower than the price at which Larsen & Toubro Ltd had offered to buy the shares from the former’s shareholders
  • Post the open offer, L&T ended up with an over 60% stake in the company, and was categorised as its promoter

Shares of Mindtree Ltd slumped 10.7% on Monday after the company said some key personnel in its top management have resigned. Mindtree’s founders have been vehemently opposing the company’s takeover by Larsen & Toubro Ltd (L&T), and hence their exit isn’t entirely surprising.

The Mindtree stock now trades at 772, about 21% lower than the price at which L&T had offered to buy shares from the former’s shareholders. Following the open offer, L&T has ended up with an over 60% stake in Mindtree and has been categorised as its promoter.

But no sooner did it check in, and the erstwhile promoters checked out, investors have become worried about the potential disruption in operations. “Obviously the exits at the top create uncertainty. The new management has to build confidence and clients may take time to give new business. It that event it is likely we may see a slowdown in near term," said Nitin Padmanabhan, analyst, Investec Capital Services (India) Pvt. Ltd.

Kotak Institutional Equities has pared its revenue growth estimates for Mindtree for the current fiscal (FY20) to 7% from 12.7% earlier.

In the IT services business, client relationships are crucial and top 10% of employees control and run the business, said an analyst.

In Mindtree’s case, analysts at Prabhudas Lilladher Pvt. Ltd point out that its greater exposure to short term discretionary spends require it to maintain high level of customer engagement. With some key executives exiting, this process will naturally get affected.

Much now depends on how L&T manages the transition. Holding on to the remaining top-level employees is crucial to limit the disruption in the business. Quick replacements for outgoing executives will also help shore-up the confidence.

Analysts expect moderation in the company’s performance in the recently concluded June quarter itself. In its recent interactions the outgoing management alluded to the slowdown in deal closures. “Mindtree indicated that new deal closures are getting delayed as clients are awaiting clarity over ownership with the ongoing L&T bid," analysts at SBICAP Securities Ltd said in a note on 17 June.

There are other headwinds for the Mindtree stock. “Post the recent proposal in union budget to increase public shareholding to 35%, it is unlikely L&T may want to raise its stake further in the company. In that event the outgoing promoters who hold around 13% in Mindtree will have to sell in the open market, which is a risk to the stock," said Padmanabhan.

Besides, some analysts have concerns about keeping L&T’s IT services arm and Mindtree as separate entities, given potential conflicts of interest. “Both companies have a rich client base which can be mined through complementary offerings. We hope that Mindtree will be eventually merged with L&T Infotech to make the most out the acquisition and eliminate any potential conflicts," analysts at Kotak Institutional Equities said in a note.

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