Brokerages wait and observe L&T bid for Mindtree

IT services firm Mindtree reported strong revenues for the quarter ended March 2019 - revenues grew nearly 16 per cent over the year-ago quarter to $262 million. The company also crossed $1 billion in annual revenues.  Brokerages, nevertheless, have gone cautious and are watching the L&T bid for the company closely.

Motilal Oswal said one of the key risk factors is uncertainty on client front with respect to recent events.  Reliance Securities, in a note, said, "Good business momentum, traction in key verticals and healthy growth outlook are the positive takeaways from the company's fourth-quarter results." The note further added, "Nonetheless, given the current bid for majority stake by L&T, we would wait and observe further developments in this regard. Important dates - May 10, last day for the Committee of Independent Directors to give their recommendations to shareholders on the open offer, and May 14-27, the period of L&T's open offer.  We keep the stock 'Under Review' till we see further clarity, mainly on current management staying on at Mindtree under a likely new owner."

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Prabhudas Lilladher in its report stated that although Mindtree posted strong revenue growth, the management has guided a low teens revenue guidance for the fiscal year 2020.

"Mindtree has a higher exposure to discretionary spending, which have short durations and requires strong communication with the clients hence making people continuity more important. We believe managing people aspects and cultural integration is critical in any acquisition process," the brokerage noted.  "We expect 11 per cent and 13 per cent compound annual growth rate (CAGR) in dollar revenues and earnings per share (EPS), respectively for FY19E-FY21E and we value Mindtree at 15 times its March 21 earnings to arrive at an unchanged target price of Rs 873," the note further added.  

The management staying on and culture have become key issues of discussion because IT services is a people's business - Mindtree's management firmly believes that "culture eats strategy for breakfast". The results of Mindtree come as a result of strategy and culture.

"By no means, I am denigrating anyone else's culture. But disturbing the culture of Mindtree (which will happen if Mindtree no longer has the current support systems post the L&T acquisition), the results will get impacted," Rostow Ravanan, CEO & Managing Director, Mindtree, recently told Business Today in an interview.  

"We believe Mindtree is a high performing system; nothing is wrong. Just because there was a problem at a shareholder level, putting the whole company at risk is bad for all shareholders," he had stressed.

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