Why LTI-Mindtree merger doesn’t make it the hottest couple on D-Street yet

NEW DELHI: Shares of both IT companies L&T Infotech (LTI) and Mindtree were trading flat on Tuesday, a day after the merger came into effect. Despite the joint entity of LTIMindtree becoming the fifth-largest IT company in India based on market capitalisation, there are little hope of its inclusion in the Nifty50 index in the March 2023 review.

"Our stance is that until the merger is completed and fresh shares are credited to the shareholders, the index provider (NSE) will consider LTI as an independent entity. With that, Mindtree’s shares/market cap will not be combined in the market cap calculation period (Aug-22 to Jan-23)," Nuvama analyst Abhilash Pagaria said.

For the stock to qualify, the free-float market capitalisation should be at least 1.5 times the free-float market cap of the smallest constituent in Nifty50.

"To the best of our understanding of the existing methodology and the recently floated consultation paper, we believe LTI sports very little chance of finding its way into Nifty50 at the Mar-23 review," he said in a note.

As part of the merger, all shareholders of Mindtree will be issued shares of LTI in the ratio of 73 shares of LTI for every 100 shares of Mindtree. The parent company, L&T, will hold 68.73% of the merged entity. The record date to determine the eligible shareholders of Mindtree for the issue of equity shares of LTI is fixed as November 24.

Analysts said the merger creates a strong challenger in the Indian IT space with a $4.1 billion revenue run-rate as the combined entity has significant revenue synergies owing to the complementary nature of clients and service offerings.

Integration risks?
Kotak Institutional Equities points out that two sources of integration risks are possible — attrition among rank and file, in the delivery and sales teams, where risks are low and attrition among titleholders.

"The primary attraction of the merger is from revenue synergy potential," it said, adding that a few portfolio gaps need to be addressed to offer full services.

“LTI can benefit from Mindtree's strength in the experience layer of digital and addressing CMO budgets while the latter can benefit from the former’s strength in packaged applications. Overlap among key clients is minimal ensuring no turf wars. Our revenue growth estimates already bake in certain synergy benefits,” Kotak said.

Citing expensive valuation, the brokerage said it is cautious on LTI and Mindtree. For LTI, the target price is Rs 4,600, signalling a downside of over 11%.

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