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Does L&T Have The Chops To Take Mindtree To The Next Level?

The promoters of Mindtree Ltd. posed five questions to Larsen & Toubro Ltd., one being if the engineering and construction major can build a “great technology business without decimating another”, as they condemned its hostile takeover bid for the mid-sized IT firm.

The only way to judge is to look at how L&T built its own information technology company compared with Mindtree over the past few years.

L&T Infotech Ltd.’s earnings grew in line with Mindtree’s over at least five financial years, according to Bloomberg data. The IT subsidiary of India’s largest capital goods maker also reported higher operating margin and return ratios and offered greater returns to investors since listing compared with Mindtree.

Also read: L&T’s Hostile Bid Is More Than Reckless Pursuit And Ego

Here’s a head-to-head comparison of how the two companies fared in the past few years...

Similar Growth Profiles

L&T Infotech’s revenue grew at an annualised rate of 16.5 percent over a decade. It stood at Rs 7,306 crore in the financial year ended March 2018 In comparison, Mindtree’s revenue rose at a compounded annual growth rate of 22 percent during the period at Rs 5,436 crore as of March 2018. The consensus of analysts’ estimate compiled by Bloomberg pegs the year-on-year growth in revenue for both companies at 28-29 percent in the financial year ending March 2019.

Profit after tax of L&T Infotech grew at an annualised rate of 18.1 percent in the last 10 years. It stood at Rs 1,112 crore at the end of financial year 2017-18. That compared with Mindtree’s growth rate of 18.8 percent during the period. The mid-sized IT company reported a profit after tax of Rs 570 crore in the previous fiscal. Also, operating margin of Mindtree dropped more than L&T Infotech’s in the last two years.

Also read: L&T To Mindtree – Your Move Next

Mindtree and L&T Infotech, however, specialise in different verticals. Banking, financial and insurance services is the biggest segment for L&T Infotech, according to the company’s filings. Mindtree’s biggest share comes from high technology and media vertical.

Return Ratios

L&T Infotech’s average of return-on-equity—a measure of financial performance calculated by dividing net income by shareholders’ funds—stood at nearly 40 percent over the last five financial years, higher than Mindtree’s 25 percent, according to a report by Kotak Institutional Equities.

L&T Infotech also pipped Mindtree in terms of return-on-capital—a measure of the company’s profitability calculated by dividing earnings before interest and taxes by debt and equity together.

Shareholders Get Their Returns

Since L&T Infotech’s listing in July 2016, its share price has risen 160 percent, Bloomberg data showed. Mindtree, on the other hand, returned less than half during the same period even as the share prices rose 64 percent. The NSE Nifty IT Index gained 51 percent since then.

Also read: What Brokerages Have To Say About L&T’s Takeover Bid For Mindtree