L&T Infotech-Mindtree Merger: What Analysts Made Of The $18-Billion Stock Deal
Here's what brokerages have to say about L&T Infotech-Mindtree merger.
Analysts said it was too early to gauge the cost synergies from the merger of L&T Infotech Ltd. and Mindtree Ltd. but the combined entity’s bigger size may help it participate in large transformation deals in the industry.
On Friday, the board of L&T Infotech approved a scheme of arrangement to merge Mindtree with itself in a share-swap deal, aiming to build a bigger client pool and diversify revenue when demand for digital services continues to surge.
L&T Infotech will issue 73 equity shares (face value Re 1 each) for every 100 equity shares (Rs 10 face value each) held in Mindtree.
Larsen & Toubro Ltd., which owns 61% of Mindtree and 74% of L&T Infotech, will hold 68.73% in the combined entity. Debashis Chatterjee, chief executive officer at Mindtree, will be the CEO of the combined entity—to be known as LTIMindtree Ltd.
The merged company is set to have a revenue of more than Rs 27,000 crore.
The $18-billion LTI-Mindtree merger deal is subject to shareholder, creditor, exchange and regulatory approvals. Till then, the two companies will continue to operate independently.
Shares of L&T Infotech were up 1.5%, while Mindtree was trading 0.8% lower as of 9:45 a.m. on Monday. That compares to a 1.2% decline in the NSE Nifty 50.
Here's what brokerages have to say about the L&T Infotech-Mindtree merger:
Motilal Oswal
Rates both stocks 'neutral' as it sees near-term risks offsetting the long-term opportunity accruing from the larger entity. Target price at Rs 5,710 and Rs 4,230 for L&T Infotech and Mindtree, respectively.
Share prices fairly factoring in a supportive demand environment.
Timing of the merger is opportune as the demand environment remains supportive. LTI, Mindtree should be able to absorb any near-term volatility due to the leadership’s focus on integration or departure in any vertical.
Departure of LTI CEO Sanjay Jalona is a key concern as he has been the key architect of its growth over the last seven years since he joined as its chief.
Larger entity will need to be careful about reassuring clients on maintaining its current level of focus. Any change in focus away from smaller deals can impact the near-term growth of the entity.
Nomura
Too early to gauge cost synergies. A rise in attrition in both companies due to the uncertainties surrounding the merger would be a key monitorable.
Benefits of the merger are more at a revenue level than at cost level. The businesses of the two entities are highly complementary with minimal client overlap. LTI is stronger in the ERP, analytics and platform businesses, while Mindtree’s strengths lie in customer experience and digital capabilities.
The combined entity’s bigger size is likely to help it participate in large transformation deals in the industry, though there could be a need to fill in certain white spaces through acquisitions.
Cost synergies will mainly accrue at general and administrative levels, given the minimal overlap in clients leading to minimal sales and marketing benefits. Synergies from this aspect could be minimal and take time to accrue.
Assuaging concerns on role clarity for senior leadership of the two entities would also be critical to ensure that both the entities continue their growth agenda until the merger happens and even after that.
Persistent Systems is our only 'buy' rated mid-cap India IT services company.
ICICI Direct
Maintains 'hold' on both LTI and Mindtree at a target price of Rs 4,490 for LTI and Rs 3,700 for Mindtree.
It values the combined entity at 30x on the merged company FY24 earnings.
The company will have access to a large pool of 82,000 employees with end-to-end capabilities. It will have access to a cash pool of nearly Rs 7,600 crore, which could be used for potential merger opportunities in the future.
Since both companies are part of the L&T Group, there could be a minimal cultural shock among employees.
Merger would take nine to 12 months to complete, and ICICI Direct does not rule out a few large potential deals going to competition till the integration process is completed.
Not building in cost synergy benefits as of now.
Nirmal Bang
No coverage on L&T Infotech currently but has a ‘sell’ rating on Mindtree with a target price of Rs 3,120.
Potential for net margin gap between LTIMindtree and TCS/Infosys (currently at 300-500 basis points) to narrow, leading to faster than peer set earnings growth.
Along with higher margins, if it can maintain its current high return on invested capital (higher than TCS/Infosys in FY21/FY22) post-merger, the market will accord a PE premium to even TCS/Infosys in this period. That is more a longer-term story.
In the next 6-12 months, Nirmal Bang would remain underweight on the IT sector and believe that both the companies, which are trading at rich multiples, will see downside.
While the merged entity will be a force to reckon with in the longer term, at current valuation, a purchase may give sub-optimal long-term returns. Advice better entry points.
IDBI Capital
Maintains 'hold' on LTI and Mindtree with a revised target price of Rs 4,984 and Rs 3,638, respectively.
Merger has significant synergies in revenue and cost.
In addition, the entity will be able to bid for bigger deals, cross sell and have end to end capabilities. However, considering macroeconomic challenges and leadership & client related integration prompt it to 'hold'.
HDFC Securities
Upgrades LTI and Mindtree to 'buy' from 'add' earlier. Estimates the combined entity to grow at 1.5x tier-1 IT peers, with an upward bias on margins and synergies.
Better delivery presence (limited centre overlap is North America) and delivery centre consolidation (overlaps in India and Europe) can improve and optimise delivery operations.
While LTI’s CEO exit may be construed as a risk, let’s not miss an equally high CEO approval score as well as a track record of Mindtree's turnaround (both operational and growth). While the near-term noise may create volatility, the foundation for ‘Tier-1’ IT growth leadership has been set.
Prabhudas Lilladher
Maintains 'buy' on both LTI and Mindtree.
Merger is structurally positive and can unlock several synergies.
Until closure of the transaction, top priority for both companies will be delivering industry leading growth and maintaining margins in line with their guidance for FY23.
Our EPS estimates for LTI and Mindtree remain unchanged for FY23. Assumes 100 basis points increase in margins due to cost synergies in FY24, resulting in FY24 EPS of Rs 194 for the combined entity.