Is L&T’s Open Offer Price For Mindtree Good Enough For Investors?

Does Larsen & Toubro Ltd.'s open offer price of Rs 980 apiece value Mindtree Ltd. well? Largely yes, according to analysts who track the software services provider facing a hostile bid.

Mindtree's earnings per share is estimated at Rs 45.9 for financial year 2018-19, according to the average of analyst estimates tracked by Bloomberg. At Rs 980 per share, it will trade at 21.3 times its earnings, making Mindtree the most expensive software services provider after market leader Tata Consultancy Services Ltd.

It's also the costliest among IT companies outside the Nifty 50 based on projected earnings in 2020-21, according to brokerage estimates.

Still, Madhu Babu, analyst at Centrum Broking, considered Mindtree “reasonably priced” at Rs 980 per share. Higher-than-expected growth over the next quarter or two could see its price to earnings multiples move even higher along with the stock price, he said.

Urmil Shah, analyst at IDBI Capital agreed, citing Mindtree's comparison with L&T Infotech Ltd., the software services arm of L&T group. Contrary to a few others on the street, Shah assigns slightly higher valuations to L&T Infotech in comparison with Mindtree for FY21 arguing that it belongs to a much larger corporate group and earnings growth has been less volatile compared with Mindtree's in the recent past. Taking this into consideration, he said Mindtree is well priced at Rs 980 per share.

The revenue growth profiles of both Mindtree and L&T Infotech have been similar over the last few years. But Mindtree's margin has been less impressive. Moreover, L&T Infotech's return on equity and return on capital employed has been superior over the past few years. Yet, the valuation gap between the two isn't significant.

Still, Avinash Gorakshakar, head of research at Joindre Capital Services, finds the offer price good enough for retail investors to participate. “I am uncertain if (Mindtree) founders will be able to defend their position against L&T (hostile bid),” he said. “And if institutional stake holders align themselves with L&T, then retail shareholders will have to follow through anyway.”