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Home / Markets / Mark To Market /  The short-term concerns of the LTI-Mindtree merger

MUMBAI/BENGALURU : The merger of Mindtree Ltd with L&T Infotech Ltd (LTI) was announced after market hours on Friday. The merged entity, LTIMindtree Ltd, with a revenue of $3.5 billion becomes the sixth-largest listed IT services provider in India.

Big-scale benefits are foreseen from this union with chances to expand across verticals and geographies. The merged entity’s potential to get large deals also becomes better. LTI’s strength in banking, financial services, and insurance (BFSI) and Mindtree’s strength in communications, media, and technology will mean more diversified offerings. LTIMindtree will also benefit from synergies in both revenue and cost, the management said in a call. This will aid operating margin expansion in the long term and help LTIMindtree achieve industry-leading growth. Analysts are largely positive on this deal but cautioned about some teething troubles. “There is a potential for near-term business and growth disruption, given the risks of employee attrition and the impact on execution and delivery," said analysts at Emkay Global Financial Services Ltd.

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This merger will be completed in 9-12 months. Until then, both LTI and Mindtree will function independently. Their respective FY23 growth guidance remains unch-anged and the management is confident of achieving the targets. Meanwhile, a steering committee will be constituted to oversee the transition. “The proposed amalgamation will be an overhang in the short term because of the leadership transition and risks of some disruptions in operations," Emkay analysts said.

Unlike other big mergers, alignment of work cultures is not expected to be a big challenge considering their common parentage, but the exit of LTI’s chief executive officer Sanjay Jalona could cause some near-term volatility in the LTI stock. Jalona is seen as a driving force behind the rapid growth of LTI since its listing and his resignation is thus a damper, analysts said.

“The exit of Jalona can be a short-term concern. That said, there are synergies on the cost front and the merged entity will eventually find it somewhat easier 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 the stellar earnings show. Shares of LTI and Mindtree gained 20.5% and 50.1%, respectively, in the past one year. Little wonder then that the FY24 valuations of LTI and Mindtree are on a par with TCS and at a premium to Infosys, Wipro, and HCL Technologies. FY24 price-to-earnings multiples of LTI and Mindtree are nearly 25 times, each, according to Bloomberg data. Meanwhile, the swap ratio of 73 LTI shares for every 100 Mindtree shares, is neutral to both companies at current share price, said analysts at Motilal Oswal Financial Services in a report on 8 May. Post-merger, parent Larsen and Toubro will hold 68.73% in the company. Based on FY22 numbers, LTIMindtree’s profit after tax was about $530 million, cash and investments were about $1 billion, and headcount was about 82,000.

Until the benefits of this merger begin to reflect, analysts are in a wait and watch mode. So, Emkay Global has kept the ratings on both the stocks under review, for now. Motilal Oswal’s analysts said: “We retain our neutral rating on both stocks as we see near-term risks offsetting the long-term opportunity accruing from the larger entity. We see the share prices fairly factoring in a supportive demand environment."

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