NEW DELHI: The long-awaited merger of the L&T Infotech and Mindtree creates a new heavyweight in the Indian IT space and analysts believe that the amalgamation of the IT subsidiaries of L&T holds tremendous value for shareholders over the medium term.
The question of importance at the current juncture, however, is what shareholders should do over the near term, especially given the volatility seen in shares of L&T Infotech of late.
“Our calculations indicate a conservative share price upside of 64% over a 2 year horizon from current levels while assigning a PE multiple of 30 to combined entity,” Abhimanyu Kasliwal, AVP-IT sector at Choice Equities to ETMarkets.
“However, the transaction is expected to close in 9-12 months, adding an element of uncertainty- thus for deep in the money positions, we advise booking partial profits.”
L&T Infotech’s stock has lost a massive 25 per cent since the end of March 2022, with the large-scale tech sell-off triggered by global cues as well as tightening of tech margins and a slowdown on global growth, Sonam Srivastava, Founder at Wright Research, said to ETMarkets.
“While this deal is a long-term positive for L&T Infotech, the LTI stock has been in trouble in the last month. Therefore, we recommend investors be cautious and wait for the economic stabilization and recovery before taking new positions,” she said.
Upon the amalgamation scheme becoming effective, all shareholders of Mindtree will be issued shares of LTI at the ratio of 73 shares of LTI for every 100 shares of Mindtree.
The new shares of LTI so issued will be traded on the NSE and BSE. Larsen & Toubro Limited will hold 68.73 per cent of LTI after the merger.
Significant scale benefits are anticipated through LTI and Mindtree’s complementary strengths resulting in a stronger portfolio of offerings across verticals for the combined entity, which is to be called LTIMindtree.
The deal translates into various synergies between the two companies being unlocked as the pair have complementary client sets and can cross-sell and rationalize the cost of operations, Srivastava said, adding that large-cap IT stocks could see new competition for larger outsourcing contracts from this new entity.
Kasliwal of Choice Equities lists out a few key areas in which the merger between the two companies would benefit shareholders.
Firstly, he cited economies of scale and scope, saying that with the two entities currently boasting of combined revenue of $3.5 billion, the deal would aid the merged entity to realize synergies, gain almost all service abilities, and get catapulted into the league of the Big 5 of Indian IT- TCS, Infosys, HCL, Wipro and Tech Mahindra.
“Hence, LTI-Mindtree can tap into larger market opportunities, drive down cost and minimise risk,” he said.
The analyst also pointed out sharing of complementary abilities and little in the way of competition as key benefits for shareholders, pointing out that since the two companies work in different verticals, the combination would help both leverage on each other’s strengths without duplication.
“LTI and Mindtree focus on largely different set of industries and clients where there is little overlap- LTI operates largely in BFSI whole Mindtree operates largely in Hi tech, media and retail- hence, we expect only limited employee churn,” he said.
“Mindtree’s portfolio has strong capabilities and clientele in verticals that are complementary to LTI. Hence, the merger will allow the pair to deliver higher value to clients by providing them diversified end to end offerings.”
The new entity is also seen having an improved financial position which would aid in in attracting more and better talent.
Choice Equities expects the merged entity to post revenue of Rs 34,700 crore by the end of the current financial year and a profit after tax of Rs 5,500 crore.
The revenue in the next financial year is seen at Rs 44,680 crore and net profit at Rs 7,500 crore.
“…we believe that the benefits of cost synergies and operating leverage will play out very well, enhancing predicted topline as well as margin,” Kasliwal said. END
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
