L&T's Mindtree stake buy: What should investors do with L&T, L&T Infotech shares?

“The maximum acquisition consideration is expected to be Rs 10,730 crore in cash, which will be fully funded by L&T from the company’s balance sheet with no debt,” according to a brokerage note.

Financially, L&T has a cash balance of Rs 16,000 crore as on December’18-end and will be able to fund the deal, it said.

JP Morgan in a note said that Mindtree deal signifies the company’s (L&T) serious intent to become larger and more credible in the IT services business, and the immediate outcome for Mindtree shareholders is positive.

“Eventual success would depend if L&T is able to retain key employees. The integration timeline with L&T Infotech (LTI) could be brought forward if Mindtree loses critical talent,” said the note.

It further added that there are synergies in LTI & Mindtree combination.

We believe the development will be positive in the medium to long term perspective given the limited capital requirement for the core business and the failure of the recent buyback program.

If you are a shareholder of L&T, there is nothing to worry because the company has enough cash reserves to fund the acquisition. ICICI Securities which maintains a buy rating on L&T said that the company’s financial position is strong enough to fund the Mindtree acquisition deal and is unlikely to impact the growth prospects of other segments.

Macquarie also maintains an outperform rating on L&T with a target of Rs 1949. The global investment bank is of the view that in the longer term a merger of Mindtree with LTI cannot be ruled out.

Mindtree acquisition does not materially move earnings for the company, and the acquisition will also not put the core business of L&T to any disadvantage. The core business will generate close to $1 bn of free cash flows in FY20, said the note.

For shareholders of L&T Infotech could witness a rise in synergies if Mindtree gets merged which should eventually happen because as L&T is unlikely to retain two listed entities with complementary capabilities in the same industry.

The LTI-Mindtree combined entity will have trailing 12 months (TTM) revenue of USD 837 million in BFSI, USD 520 million in hi-tech & media and USD 554 million in manufacturing, retail and CPG.

“This implies scale larger than Tech Mahindra in BFSI, hi-tech and media verticals. We regard USD 500 million in annual revenue as a good threshold to judge critical mass in a particular vertical that will enable a mid-cap firm to compete against Tier-1 peers,” Elara Capital said in a note.

With revenue of USD 500 million+ in a particular vertical, a firm will have 10-12 client references with USD 20-50 million in annual revenue. Elara Capital sees 38 percent upside in LTI as it places a target of Rs 2160 in the next 12 months.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.