LTI-Mindtree merger to boost topline growth

For the combined entity, BFSI will be the largest vertical, with 35% revenue exposure, followed by retail CPG manufacturing at 26%, and by CMT/Hi-tech at 25%, together 86% of revenues. Management believes there is little overlap between the two in clients and service lines; hence, our expectation of sustained growth rates. The merger will close toward end-FY23 (9-12 months from now), but we have considered the combined financials from FY23 in this report

Mumbai: Through a share swap, Mindtree will amalgamate with LTI in the next few months. The combined entity offers high growth potential (in BFSI, Hi-tech and Retail), a diversified base (LTI was 46 per cent BFSI; Mindtree, 44 per cent CMT) and better margin defence on account of likely G&A cost synergies.

Revenues to touch $5 billion by FY24 and margins to hold at 20 per cent after M&A-related costs and potential employee-retention-related expenses. LTI-Mindtree can deliver a Rs176 EPS by FY24 and now trades at 26x FY24, which we find attractive. Our target multiple is 35x FY24 with a revised target of Rs 6,150.

For the combined entity, BFSI will be the largest vertical, with 35 per cent revenue exposure, followed by Retail CPG manufacturing at 26 per cent, and by CMT/Hi-tech at 25 per cent, together 86 per cent of revenues. Management believes there is little overlap between the two in clients and service lines; hence, our expectation of sustained growth rates. The merger will close toward end-FY23 (9-12 months from now) but we have considered the combined financials from FY23 in this report.

As per a study by Anand Rathi, Margins may be 20 per cent as synergies offset costs. Both the companies have individually prioritized growth over margin expansion beyond 20 per cent. This would continue for the combined entity too. Therefore, it is unlikely that management will try to extract cost synergies in a big way. Instead, it could be utilized toward employee incentives (to contain attrition, more so at key managerial/client-facing positions), to absorb merger-related

costs and for higher revenue. Therefore, we expect margins to remain at 19.7 per cent in FY24 (20.1 per cent in FY22), representing a mere 40bp headwind (reopening, attrition, travel, etc.) over two years. The swap ratio is 1.37x, or 100 Mindtree shares equal 73 of LTI.

A finding by Emkay says that the merger has the potential to create greater value for all stakeholders. The merged entity will be having versified end-to-end offerings, participation in large contracts and deeper domain expertise. Its employees will be provided with better growth opportunities and ability to attract and retain the best talent.

In terms of partners, broader collaboration opportunities, improved integration solutions, augmented intellectual capital and stronger implementation capabilities will come.

As regards investors, it comes with a strong consolidated financial position, profitability improvement with scale benefits in the medium- to long term; however, there is also a potential for near-term business and growth disruption, given risks of employee attrition and the impact on execution and delivery.

While a merger between the two entities was always on the cards, management believes that the time seems opportune now as both entities have steady operations, scale and strong leadership in place, and can also avoid potential conflicts with growing scale in existing relationships and prospects. While the proposed amalgamation will be an overhang in the short term due to the leadership transition and risks of some disruptions in operations, we expect it to be positive in the medium- to long term on account of the complementary portfolio of verticals and geographies, synergies through scale, cross-vertical expertise, and talent pool.