What LTI-Mindtree merger means for two IT companies, their current investors

What LTI-Mindtree merger means for two IT companies, their current investors – Mail Bonus

NEW DELHI: The LTI-Mindtree merged entity offers a strong long-term outlook and analysts believe it could benefit from a premium for larger peers Infosys and TCS. But short-term risk is high, they said, especially as Sanjay Jalona leaves Larsen & Toubro Infotech (LTI). Integration in this highly volatile environment can pose key challenges, experts said.

Although the prevailing values ​​are rich, they are either neutral or negative on the two stocks, for fear of short-term fluctuations ahead.

The exchange rate of 73 LTI shares for every 100 Mindtree shares is neutral for both companies at current share prices. This, analysts say, will lead to the issuance of 12 million new shares in LTI to Mindtree shareholders and a 41 percent dilution for LTI shareholders.

Motilal Oswal has maintained a “neutral” rating on both stocks as it believes that the risk in the near future outweighs the long-term opportunities created by the larger unit.

“We see the departure of Jalona’s CEO and CEO as a key concern for LTI as he has been a key architect of its growth for the last seven years since he took over as CEO. “that Debashi’s Chatterjee has done exceptionally well in maintaining and rebuilding Mindtree after its founding team left the company, we will look into any exits at LTI that may have an impact in the near future,” it said.

Chatterjee is the CEO and CEO of Mindtree.

Edelweiss also sees the risk of a high-level and high-performance exchange rate in a tight supply market. It sees the cancellation of customers in short-term contracts, with the possibility of increased competition.

“Although the companies have operated under the auspices of L&T, cultural harmonization will be underway (Mindtree scores slightly higher in some measure on the supply side). “A record of turning around MTCL (both in terms of operations and growth). While short-term noise can create volatility, the foundation has been laid for ‘tier-1’ growth leaders in information technology,” he said.

In a comment, Girish Pai, head of equity research at Nirmal Bang Institutional Equities, said that if the current implementation of both companies is successful, it could exceed Tier-1 growth over the next 10 years.

“Also, with both revenue and cost aggregate effects, we believe there is a possibility that the net margin between LTIM and TCS / Infosys (now at 300-500 bps) will decrease, leading to faster economic growth than peer groups. Furthermore, along with higher margins, if it can “Given the current high level of profitability after the merger (former goodwill), we believe that the market will provide even a TCS / Infosys PE premium during this period. This is a rather long story,” said Pai.

But over the next 6-12 months, Pai said he would continue to be underweight in the IT sector, believing that both companies, which trade in rich multiples, will see downsides.

The merger is considered to give the merged entity the opportunity to consolidate its position in the Banking, Financial Services and Insurance (BFSI) divisions, increase the scope of high vertical interest rates such as high technology and consumer-packaged goods, retail and expand into new verticals. such as travel, transportation and hospitality.

“Although the merger will be a force to be reckoned with in the long run, we believe in the current valuation that a purchase can provide a more favorable long-term return. We recommend better access points. We do not currently have official coverage of LTI but have a ‘Sell’ rating Mindtree with the goal of 3,120 Rs, “said Pai.

Emkay Global said it has set its target for LTI and Mindtree, as well as its ratings for the two shares in ueview, as it assesses the short- / long-term impact of the proposed merger on revenue (combined earnings growth and margins) and leadership change. This brokerage had a previous rating of both Mindtree (Rs4,400) and LTI (Rs6,350).

Edelweiss’ goal is 7750 Rs for LTI and 4,917 Rs for Mindtree.

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