L&T Infotech investors seen frowning at Mindtree chase

Cogencis, Thursday, Mar 14

By Nikita Periwal

MUMBAI – Investors are likely to be unhappy about Larsen & Toubro Infotech Ltd's plan to acquire significant stake in Mindtree Ltd, as it would only result in a bid to gain control, not add any significant value to the business.

V.G. Siddhartha, a key promoter of Mindtree, has appointed bankers to scout for buyers for his 21% stake, with media reporting that private equity players and some companies such as L&T Infotech have submitted bids.

The Bengaluru headquartered mid-sized information technology company with sales of $847 mln in 2017-18 (Apr-Mar) has clients such as Hermes, The Carlyle Group, and Microsoft Corp in its roster.

In contrast, L&T Infotech had $1.1 bln rupees of sales in the same period.

The acquisition, if it happens, will largely mean acquiring sales and the staff, but will not lead to a strategic advantage, analysts said.

Indian information technology companies are struggling to find the next growth lever, but most of them have largely done small-ticket acquisitions that plugged service gaps and were earnings-accretive, almost right from the start.

"If you look at the company's (L&T Infotech) past acquisitions, they have always focused on capabilities, revenue and sometimes a geographical presence…they are not the kinds who chase scale, so this is definitely not in line with their prior acquisitions," said an analyst with a leading city-based brokerage.

The Mumbai-based company's acquisition of Germany's Nielsen +Partner, and Ruletronics' operations in the UK, the US and India added to its roster some more banking clients and increased its digital business.

Even as the demand for Indian technology services is the best in nearly a decade, L&T Infotech stands to gain little by buying a peer which will practically offer no synergies.

"What will matter in sometime from now is only how well a company is doing in its digital business, and that does not require scale," another analyst said. There are several small niche companies whose growth in the digital space is outweighing that of their heftier peers.

While Mindtree gets about half of its revenues from digital services, the proportion for L&T Infotech is relatively lower at about 40%, an analyst said.

The only positive if the acquisition were to go through will be the acquisition of more customers requiring digital services, a new thrust area for Indian IT companies to improve revenue and margins, and cut costs, said analysts.

L&T Infotech currently has about 20 bln rupees of cash for acquisitions, and will have to fund at least a third of Siddhartha's stake in Mindtree through debt.

"The amount itself that L&T Infotech may have to spend is not an issue, it is just that the deal does not make sense for them," another analyst said.

Both L&T Infotech and Mindtree get the maximum of their sales from the banking and financial services vertical, with North America as their largest geography. The buyout of Mindtree will not offer L&T Infotech either a presence in new geographies or verticals, while a hefty price tag will exert pressure of valuations of the company.

"Buying Mindtree could have made sense at 750 (rupees a share), but at 1,000 rupees, it is just not worth it," the analyst said.

Shares of Mindtree closed at 950.10 rupees on the National Stock Exchange today, up nearly 3% from the previous close. The stock hit a three-month high of 953 rupees earlier today. Shares of L&T Infotech closed at 1,655.95 rupees, up 1.4%. 

The acquisition, which is not seen receiving support from other promoters of Mindtree who own over 13%, could also result in an acrimonious work environment and result in L&T Infotech struggling to integrate envisaged gains, analysts said.

L&T Infotech has typically been valued at a near 20% premium to Mindtree, and the combined entity is likely to feel the heat of taking a lesser-valued company on board, analysts said.  End

Edited by Maheswaran Parameswaran

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