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Prabhudas Lilladher
Mindtree (Hold)
CMP: ₹950
Target: ₹887
Hostile bids are very uncommon in IT services industry as IT services is a people centric business. Managing people aspects and cultural integration is critical in any acquisition. Attrition of Mindtree (13 per cent in Q3FY19) is low as compared to other mid-cap IT players, any disintegration of management can cause spike in attrition.
We are downgrading Mindtree (MTCL) to ‘Hold’ from ‘Buy’ on hostile acquisition of MTCL by L&T. We believe such scenario can result in 1) Spike in attrition; 2) slowdown in business momentum due to discord between L&T and Mindtree’s current management; 3) likely de-rating due to uncertainty during hostile takeover.
We estimate dollar revenue growth and EPS CAGR of 10.7 per cent & 12.5 per cent respectively from FY19E- FY21E. The deal values Mindtree at 16.6x FY21E (₹980/share) which leaves little scope for near term re-rating given uncertainty on management change and business momentum.
We value Mindtree at 15x Mar-21E earnings and arrive at target price of ₹858. The announcement of a buyback at a significant premium (March 20, 2019) or an upward revision of the offer price (₹980) is a near-term risk to our call.
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