With L&T’s Takeover of Mindtree, Attention Should Shift to Mid-Cap IT Stocks

This is possibly the first hostile acquisition in India’s IT sector.

L&T has acquired a 20.3% stake in Mindtree from V.G. Siddhartha and his related entities for Rs 980 per share, along with placing an order to purchase an additional 15% from the bourses and an open offer to purchase an additional 31% stake.

Investor interest in the IT sector has historically been largely limited to the top three players including TCS and Infosys. But now, attention has shifted to mid-cap IT players on hopes of merger and acquisition (M&A) opportunities with leading tech players from India and overseas.

L&T’s offer price – at Rs 980 per share late on Monday evening – is at a small premium of 1.8% to Mindtree’s closing price of Rs 962.5 on the same day, but still well below the 52-week high of Rs 1181.9 of this stock, reached on September 11, 2018.

Nevertheless, this acquisition by L&T has valued Mindtree at nearly 19 times its estimated FY20 earnings and that is broadly in tune with the valuations for the leading players in the sector – Infosys, at Monday’s close, trades at a P/E of nearly 18 times the estimated FY20 earnings while it is about 22 times for TCS and 14.3 times for Wipro.

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It was no surprise that other mid-cap IT stocks rose in early Tuesday trading on the BSE – for instance, NIIT Technologies gained 0.5% to Rs 1,325.3 – not too far from its 52-week high of Rs 1,425.  

Mindtree’s existing promoters, in a press release, have expressed their unconditional opposition to the takeover offer by L&T. The company's board is meeting on Wednesday to decide on its buy-back offer and further clarity is awaited. In addition, L&T’s acquisition announcement also awaits regulatory approval.

How L&T gains from this acquisition

L&T has an existing technology-based company, L&T Infotech, whose existing client base includes Nets – a leading payments company in the Nordic region – and media reports have also highlighted customers like Chevron and Barclays. Meanwhile, Mindtree’s client base is understood to include Avis and Marriott.

L&T has highlighted that Mindtree would remain an independently listed company. Nevertheless, there would be synergies with its existing company, L&T Infotech. In addition, it is widely expected that, going forward, L&T Infotech would be able to bid for larger IT and outsourcing contracts on a global basis – given the wider technical capabilities accruing from Mindtree.  

And the planned acquisition of Mindtree would also help to ramp up the turnover of the IT business of the L&T group vis-à-vis the top three Indian IT players.

For instance, the combined core income from the operations of L&T Infotech and Mindtree, during the first nine months of the current financial year, amounted to Rs 12,141 crore.  

S.N. Subrahmanyan, CEO and managing director, L&T, said in a media statement, "This acquisition is part of our strategy to deliver industry leading IT services to our clients worldwide. It will also help propel L&T's technology portfolio into top tier of Indian IT companies."

Meanwhile, Wipro – the smallest of the top three Indian IT players – had a consolidated income from operations of Rs 43,858 crore during the first nine months of the current financial year.

What should Mindtree shareholders do?

Shareholders need to await the buy-back price that is expected to be announced on Wednesday, as there is a possibility that it could be higher than the acquisition price of Rs 980 announced by L&T.

Also, with the global IT sector on an upswing, the growth prospects for mid-cap players like Mindtree do look attractive. That is expected to help players in this sector report improved operational performance.

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