L&T’s Mindtree pursuit may require investors to show faith


ET Intelligence Group: Larsen & Toubro, India’s largest infrastructureNSE -1.72 % company, is perceived by investors as a proxy to the country’s capital expenditure trend. The flow of infrastructure orders therefore has been historically the most important parameter to gauge the company’s performance.







This may, however, change if the company’s plan to acquire a major stake in MindtreeNSE 1.05 %, a Bengaluru-based mid-tier software company, fructifies. The attempt at hostile tak ..

The company’s rationale for acquisition of Mindtree is to grow the high margin IT services business of its subsidiary L&T Infotech where it holds 75 per cent stake. In addition, according to the L&T’s management, Mindtree’s existing portfolio of clients and projects has no major overlap with that of L&T Infotech.

The acquisition may become an overhang on the stock under two scenarios. First, if L&T is unable to acquire a majority share, it will be stuck with an investment with no management control. The choice for investors is difficult. On one hand, L&T’s open offer price of Rs 980 does not offer an attarctive premium over Mindtree’s closing stock price of Rs 943 on Tuesday. Also, given the strong track record of Mindtee’s promoter group, there is a sound reason for investors to ensure status qu ..

In the second scenario, it succeeds in acquiring more than 51 per cent stake through open offer and market purchase, but fails to win consent for Mindtree’s existing management. Under this scenario, L&T may have to devote considerable time and effort to maintain business as usual at Mindtree and may even face higher attrition. This is a significant concern since workforce is the biggest asset in the software sector. Besides, according to analysts, Mindtree has a high exposure to discretionar ..

The impact of the acquisition on L&T’s financials depends on the opportunity cost of the funds. L&T’s cash balance of Rs 16,000 crore generates about 5.5-6 per cent pre-tax yield. The street fears that the allocation of cash for acquisition will be earnings dilutive in the near term. Mindtree’s FY20 expected earnings per share (EPS) is Rs 52.5, according to Bloomberg consensus estimates. Any change in the return on the cash due to the proposed acquisition would affect the actual EPS.

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