At 17x FY20e, and with L&T market purchase/open offer at Rs 980/share, upside seems capped; ‘Buy’ under review after recent run
L&T has entered into a definitive share purchase agreement to acquire 20.32% stake in Mindtree from V G Siddhartha and his related entities. This amounts to Rs 32.7 bn at Rs 980/share. It intends to acquire a controlling stake in the company with a market purchase of up to 15% and an open offer of up to 31%, all at Rs 980/share. So, apart from the above 20.32%, up to 15% will be purchased from the open market at a price not exceeding Rs 980 for Rs 24.4 bn with an intent to take a majority stake. Lastly, an open offer has been made for another 31% stake at Rs 980 totalling Rs 50.3 bn. If all the above transactions go through, the total share purchased will be 66% for Rs 107.3 bn. The acquisition is expected to be completed by Q1FY20, subject to regulatory approvals.
Financial estimates & implied valuation
Over FY18-20e, we estimate MTCL’s CC revenues to grow at a CAGR of 15%, Ebitda at a CAGR of 40.5% and EPS at a CAGR of 24%. Based on our estimates of MTCL’s FY20 sales/Ebitda/PAT, L&T’s offer prices MTCL at 2x Price/Sales, ~13x Price/Ebitda and ~18.6x PE.
As per the company, the transaction is in-line with its strategy of focusing on services and an asset-light model. Mindtree will remain an independent listed entity and will gain access to larger client base.
Our view on Mindtree
L&T has shared that MTCL will remain an independent listed entity, so no intent has been cited of merging the same with LTI, at this moment. MTCL promoters continue for now, but it remains to be seen for how long, without the control. There is little (if any) case for owning two businesses competing with each other in the attractive segment of Digital deals. So the two should eventually merge.
In the meanwhile, for employees at MTCL, the eventual merger with LTI could potentially pose risk of redundancies arising out of integration and attempts to extract synergies. Some of MTCL’s top clients have had long standing relationships with the company and its founding leaders have been the face of these. Top 10 clients contribute 44% to revenues. Risk to growth/relationship in one/multiple accounts too, cannot be completely ruled out.
At 17x FY20e, and with market purchase/open offer at Rs 980/share, upside seems capped. We will review our Buy rating on the stock, after the recent run taking it closer to our target price
of Rs 1,000.