After acquiring and merging over seven companies across various capabilities since 2016, Larsen & Toubro Infotech’s potential merger with Mindtree could help it achieve scale and right positioning to unlock mega deals that hitherto went to big Indian IT services companies.
“In technology, generally we are dealing labour arbitrage business. When they acquire a company, it is to gain strategic clients, access to various markets, but especially get trained manpower. As these IT companies become bigger they are able to access bigger deals,” Sandip Agarwal, ED, IE, Edelweiss Securities, told BusinessLine.
He explained: “Already Mindtree and LTI have over billion dollars in revenue, making them able to participate in almost 80-90 per cent deals. Once they achieve $4-5 billion in revenue, they will be able to access the balance 10 per cent large deals. Over the next one year, there will be a lot of large deals coming into the market on the back of rise in digital transformation, and these companies will need strong and big teams in the backend.”
As of now, the combined revenue of LTI and Mindtree will be around $3.5-4 billion.
Agarwal added that the other key reason for the merger would be talent retention as the industry continues to grapple with labour shortage. Having in-house manpower retained strength would also help the company in managing costs better.
Combined strengths
According to Jyoti Roy, DVP, Equity Strategist, Angel One, the merger was always suppose to happen eventually since the acquisition.
“The acquisition was great for LTI because there wasn’t much overlap in businesses. LTI’s majority revenue comes from the BFSI sector, contributing almost 45 percent of its revenue, manufacturing covers close to 17 per cent and then energy and utilities. But for Mindtree, BFSI is the weaker segment with just 18 per cent of revenue, they make money and bring capabilities under Hi-tech TMT (telecom, media and technology) space. Mindtree is also big in the travel & hospitality and retail & consumer space. Hi-tech TMT accounts for 43 per cent revenue for Mindtree,” he told BusinessLine.
“This is a strategic merger for both Mindtree and LTI and a win-win situation. The bigger benefit of the merger is getting the economies of scale. The general administrative expenses cover 4-6 per cent of the revenue. So there is some hope of rationalisation in spending,” he added.
M&A gameplan
LTI has played well in picking up the right bets, which, according to sources, is currently contributing nearly half of its total revenue. Some of the top names to get acquired include Cuelogic, an outsourced productised IT service provider, which helped LTI gain expertise in digital products and services, that fuelled its recent growth; Nielsen + Partner, a Swiss Temenos Wealth Suites specialist helping LTI strengthened its reputation as a major player in the wealth management sector.
LTI also acquired PowerUp Cloud in 2019 through which it has set its ambitions on a $1 billion cloud practice.
“LTI is a rapidly growing company that has developed an acquisitions-led growth strategy to expand the breadth and depth of its services. Over the past few years, LTI has completed seven major M&A deals, which have allowed the company to delve into exciting new areas like Digital, Data, and Cloud,” a source said on the condition of anonymity.
“Today, these business segments account for approximately half of LTI’s total revenue, reflecting the success of LTI’s approach. As LTI continues to expand and evolve its offerings, we can expect to see even more exciting developments from this company,” the source added.