Post merger, LTIMindtree honchos still exiting raises eyebrows
Summary
- Exits are common following any merger, but discomfort about senior-management attrition seems to have lasted longer than expected in this case.
When the merger of L&T Infotech (LTI) and Mindtree was announced in May 2022, top management exits were foreseen as a key risk for the merged entity. That forecast proved correct and continues to play out. Last week, Vinit Teredesai resigned as chief financial officer of LTIMindtree Ltd. He will be replaced by Vipul Chandra, the head of treasury at parent company Larsen & Toubro.
Exits are common following any merger and this one is no exception. LTIMindtree has seen a number of key personnel leave, but discomfort about senior-management attrition seems to have lasted longer than expected in this case.
“Management’s accommodative stance to reduce risks has paradoxically turned into a riskier policy, leading to frequent senior-management exits and associated instability," analysts at Kotak Institutional Equities wrote in a report on 12 March, adding they would have preferred quick changes that restricted the pain to one or two quarters.
Unsurprisingly, the stock is down almost 17% this year, against a 6% gain in the Nifty IT index. With global IT demand still weak, senior-management attrition is expected to be an additional headwind for the company, clouding its earnings outlook and delaying potential synergies from the merger.
Recall that the management aims to realise revenue synergy of around $1 billion over next four to five years, led by increased cross-selling opportunities from a bigger client base. The earnings before interest and tax (Ebit) margin is expected to improve by 200 basis points to 19-20% by FY27, led by growing scale and better utilisations.
But as things stand, earnings performance has been unimpressive. In the December quarter (Q3FY24), sequential constant-currency revenue growth was a mere 0.7% thanks to furloughs. Management’s commentary on the near-term demand scenario and margins was bleak, and some brokerages clipped their earnings-per-share estimates for FY24 and FY25.
“After a weak Q2FY24 and Q3FY24, revenue growth will remain muted in Q4FY24 and Q1FY25 as discretionary tech spending remains soft and clients remain cautious with regard to evolving macroeconomic conditions. With an increase in the number of multi-year deals, the total contract value to revenue conversion has been weak," read a Centrum Broking report dated 12 March.
To be sure, order inflows are robust and the impact of some margin levers will be reflected gradually. However, the stock’s valuation is far from reasonable. It trades at 28 times estimated FY25 earnings, according to Bloomberg data. This is higher than those of larger peers Infosys Ltd and HCL Technologies Ltd.
