News Analysis

Partly synergistic offer for Mindtree if merged with L&T

K Venkatasubramanian BL Research Bureau | Updated on March 20, 2019

As the tussle for a controlling stake in Mindtree initiated by the engineering conglomerate L&T gets hotter, the management of the latter has reportedly indicated that even after taking a controlling stake, the software firm would operate as a standalone entity, at least as of now.

Be that as it may, if the company is eventually integrated with L&T Infotech at some point in the future, the latter is likely to find it beneficial, though only from a purely verticals’ synergy perspective — given that the key segments do not overlap. Another positive for L&T Infotech could be that the focus on digital offerings is very strong in the case of Mindtree.

But there are likely to be challenges on the financial and operation fronts, as L&T Infotech enjoys much better performance metrics and superior financials than what Mindtree does.



Partly synergistic

Mindtree’s key vertical is hi-tech & media (that contribute around 39.4 per cent of revenues), as that was the main segment in which the company started operating. In the case of L&T Infotech, BFSI (banking, financial services & insurance that account for 46.9 per cent of revenues) is the key sector of operation. Segments such as retail, manufacturing and consumer packaged goods (CPG) also could have synergies.

L&T Infotech has presence in energy & utilities, while Mindtree exited the segment a few years ago. In travel & hospitality, Mindtree has a fair execution track record. Thus, there is limited overlap in terms vertical spread and client base.

Mindtree derives nearly half its revenues from digital services, while for L&T Infotech the proportion is 37 per cent. Thus, L&T Infotech would be a beneficiary of Mindtree’s digital execution capabilities.

Financial & operational mismatch

L&T Infotech enjoys a much higher scale of revenues than Mindtree, having crossed the $1-billion threshold a while back. Mindtree is yet to touch that mark (expected to this fiscal). L&T Infotech enjoys an EBITDA margin of 23.5 per cent, which is comparable with that of top-tier IT companies, while Mindtree’s margins hover around 15-16 per cent levels. Net margins, too, are much more impressive in the case of L&T Infotech.

Operationally, the utilisation rate for L&T Infotech is a high 83 per cent, while for Mindtree it is about 76.4 per cent. It thus appears that L&T Infotech maintains a much smaller bench strength; Mindtree, on the other hand, appears to have a larger proportion of unbilled resources. A higher utilisation rate also partly explains L&T Infotech’s superior margins.

Attrition is higher for L&T Infotech, indicating that Mindtree may have a better employee retention strategy than the former.

Despite the disparities in financials and operational parameters, the market views Mindtree as a premium catch. The trailing 12 months’ price-earnings multiple for Mindtree is at 21 times, while for L&T Infotech it is 20 times.

A merger, and a combined entity that mirrors L&T Infotech’s operational and financial profiles, may be a tough ask for the foreseeable future.

Published on March 20, 2019

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