Mindtree investors get cold feet as promoters check out, L&T checks in

Shares of Mindtree Ltd plunged 11% in morning trade after the company over the weekend said its key personnel in the top management were leaving the company. The outgoing people opposed the takeover by Larsen & Toubro Ltd (L&T), whose stake in Mindtree crossed 60% post its recent open offer.

Mindtree shares now trade at Rs769, 22% lower than the price at which Larsen & Toubro Ltd had offered to buy shares from the former’s shareholders. Post open offer, it has ended up with an over 60% stake in the company and has been categorised as its promoter.

But no sooner did it check in than the erstwhile promoters checked out, by resigning late last week. Investors are worried this will disrupt operations. “Obviously the exits at the top creates uncertainty. The new management has to build confidence and clients may take time to provide new business. In that event it is likely we may see a slowdown in the near term,” said Nitin Padmanabhan, analyst, Investec Capital Services (India) Pvt. Ltd.

In the IT services business, client relationships are crucial and the top 10% of the employees control and run the business, says an analyst. In Mindtree’s case, the top layer of this crucial set of people are on their way out. This creates uncertainty not only among employees but also among the clients.

Much now depends on how L&T manages the transition. Holding on to the remaining top-level employees is crucial to limiting the disruption in the business. Quick replacements for outgoing executives will also help shore up confidence.

The ownership change and the outgoing management’s opposition is taking a toll on the company. Most analysts expect moderation in the company’s performance in the recently concluded June quarter. In its recent interactions, the outgoing management even alluded to the slowdown in deal closures. “Mindtree indicated that new deal closures are getting delayed as clients are awaiting clarity over ownership with the ongoing L&T bid,” analysts at SBICAP Securities Ltd said in a note on 17 June.

There are other headwinds for the Mindtree stock. “Post the recent proposal in the Union budget to increase public shareholding to 35%, it is unlikely L&T will want to raise its stake further in the company. In that event, the outgoing promoters, who hold around 13% in Mindtree, will have to sell their stake in the open market, which is a risk to the stock,” says Padmanabhan.