Mindtree hostile takeover: L&T needs to follow friendly approach with IT firm, says veteran investor

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Updated: March 26, 2019 12:06:32 PM

Amid ongoing volatility in the stock markets, Mindtree-L&T battle has left the investors sceptical on how to go ahead.

sensex, niftyThe Mindtree board will meet today to discuss a proposed equity buyback, even as L&T plans to make a detailed public statement on an open offer for Mindtree shares.

Amid ongoing volatility in the stock markets, Mindtree-L&T battle has left the investors skeptical on how to go ahead. In view of this, it’s important that the leading construction firm speaks to the IT firm promoters and adopt a friendly approach to have a say in the management, despite an early hostile bid, tells a veteran stock market veteran to Financial Express Online. Along with this, the possible stock buyback move may also provide a boost to the Mindtree stock sentiment, Rajiv Ranjan Singh, CEO Stock Broking, Karvy also tells Ashish Pandey of Financial Express Online.

The Mindtree board will meet today to discuss a proposed equity buyback, even as L&T plans to make a detailed public statement on an open offer for Mindtree shares.

Here are edited excerpts of the interview:

The stock markets are on a rally largely on account of sustained foreign fund flow lately. Where do you see Sensex and Nifty heading?

We have been optimistic on the prospects of equity markets for 2019. We believe that the probability of a stable coalition assuming office after the general elections are high, and indeed the market is discounting a higher probability of this event.

Secondly we believe that after a long disappointing run, corporate earnings are likely to pick up and grow in a range of 15-20% from FY 2019-20 as capex spending picks up. Both of these factors are supportive of equities. However, in the electoral season, while volatility may rise, the outlook is positive. Our 2019 year end target for Sensex is 45,000 and for Nifty the target is 14,000.

The recent developments around L&T and Mindtree have impacted the share prices of the firms. What’s your take on the entire episode? Share your advice for investors.

Hostile takeovers are a rarity in India. Being in the IT sector, the assets for Mindtree are largely people and organizational capital. This means that despite the initial hostile bid, L&T would need to speak to the promoters and adopt a friendly approach, if they would like to have a say in management. Mindtree may also decide on a stock buyback. Both of these are likely to boost sentiment for the stock and the Mindtree stock should outperform peers.

What’s your advice for retail investors?

We are optimistic about equities in 2019 and advise investors to buy equities, especially in capital goods and banks. We also believe that mid caps are likely to outperform. The start to 2019 was not good for equities and may have been unnerving to investors. However, there is a saying that to make a bull market, you need to climb a wall of worry, and there were worries. Markets were concerned about elections, an economic slowdown and fears of a global recession. As worries fade markets are likely to deliver positive returns to investors.

Risks of market volatility due to political uncertainty around elections remain. Where should investors invest – large-cap funds relative to mid-cap funds?

Our research indicates that mid and small caps tend to perform better when two conditions are met. Firstly they perform better when markets are in a risk on scenario. Secondly when valuations are favourable compared to large caps. Right now we believe that markets are in a risk on mode. Though much of 2018, mid caps were unfavourably valued compared to Sensex, leading them to underperform.

Now the relative valuation are in the neutral zone, with the mid cap index at par. However, earnings for mid cap stocks are likely to grow faster. We expect mid caps to outperform large caps over the next 12 months. Mid caps tend to be more volatile, and elections are a risk, however, we would use the dips to buy mid caps. Ideally and investor should have a mix of large caps and mid caps in their portfolio, in the ratio of 75% large caps and 25% mid caps.

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