What potential L&T Infotech & Mindtree merger could mean for the respective IT stocks
IIFL sees strong fundamentals driving stock-price returns in both, LTI and Mindtree, over the next 12 months
As per media reports, the boards of L&T Infotech (LTI) and Mindtree (MTCL) may consider merging both the companies soon. While both have clarified that the reports are speculative, the potential merger has been deemed an eventuality since Mindtree's acquisition by L&T (conglomerate parent) in March 2019, as per IIFL.
“Both companies have complementary capabilities, verticals and client exposures. We believe this may not be a bad time for initiating the merger process, as both companies now have a similar growth and margin profile, with a strong FY23 outlook," said the brokerage and research firm in a note.
The brokerage has Buy ratings on both the IT stocks, with a slightly higher upside on Mindtree shares and sees strong fundamentals driving stock-price returns in both, LTI and Mindtree, over the next 12 months.
“Assuming the merger happens at the same valuation for both stocks, it makes MTCL relatively more attractive than LTI, given its discount. However, we await any colour on the valuations before giving a view on the same," the note stated.
While swap ratios are not known, IIFL notes that L&T owns around 74% in LTI and 61% in Mindtree, even as LTI is trading at 10% premium to Mindtree. In a merger of this proportion, managing leadership transition is the biggest risk; however, the brokerage believes this would have already been part of the planning since Mindtree acquisition.
“L&T Infotech and MTCL operate at similar margins. While at the time of MTCL’s acquisition, the gap in the respective operating margin profile was close to 600bps, it has completely converged to around 18% for both companies (for FY23, as per IIFLe)," it added.
Most of the inefficiencies in the cost structures have been potentially removed and segment-level profitability is now in the top quartile among peers and IIFL believes this augurs well for potential cost realignments.
The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
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