When will LTIMindtree start delivering on its merger promise?

“It appeared to be very democratic. There were lots of meetings and they took our inputs on everything to evolve a new structure,” said a former employee, who did not want to be identified. “Eventually, however, the bosses at L&T (the construction and engineering parent) called the shots,” said the executive, who quit to join another tech services company even as the integration was on.

If mergers are punctuated by certain traits—culture clash, leadership attrition, doubts about synergies, tepid growth, and so on—the merger of LTI with Mindtree to form LTIMindtree has seen it all. Nearly two years after the integration was initiated and 18 months after they started working as a joint entity (from April 2023), murmurs of the stark cultural differences between the entrepreneurial mindset-driven Mindtree and old economy-backed LTI haven’t died down.

Almost 20 senior executives have quit, many ostensibly because of cultural differences and overlapping roles. Decision-making has apparently suffered, affecting client conversations. Consequently, the joint entity has been able to add only $700 million of revenue in the last two years.

Making things worse, the integration has been taking place at a time when the macro environment is challenging. Client spending slowed due to high interest rates, high inflation, global economic uncertainty, and the Russia-Ukraine conflict. These factors and the integration challenges have left the company lagging behind its rivals in the top tier, which it wants to break into.

“Whenever such a big merger happens, there are teething troubles—cultural differences, role overlaps do happen,” added Sumit Pokharna, vice president, Kotak Securities. “These get highlighted when the macro environment is bad, as has been the case in the last year or so. LTIMindtree faced both external (macro) and internal (cultural) challenges.”

Almost 20 senior executives have quit, many ostensibly because of cultural differences and overlapping roles. Decision making has apparently suffered.

The company’s dream of breaking into the big league will take a while to become a reality. LTIMindtree’s 2023-24 revenue stood at ₹35,517 crore, up 7%. While this growth was better than the top deck barring HCL Tech, which grew 8.3% (TCS grew 6.8%, and Infosys was up 4.7%, while Tech Mahindra contracted 2.42%), it was on a much smaller base. To put that in context, TCS is almost 6.8 times larger than LTIMindtree and even Tech Mahindra, ranked fifth in the Top 5, is 1.5 times its size.

LTIMindtree’s net profit margin declined from 13.3% in 2022-23 to 12.9% last year, whereas Tata Consultancy Services (TCS), Infosys and Wipro saw an improvement despite the last fiscal year being a challenging one. TCS’s net profit margin, for instance, improved from 18.8% in 2022-23 to 19.1% in 2023-24.

“The company has not grown to the expectations of the market. It can do a lot more if it sorts out the integration challenges,” said Gaurav Vasu, chief executive and founder of Unearthinsight, a Bengaluru-based consultancy.

Interestingly, another group entity, the 12-year-old, $1.2 billion, Vadodara-based L&T Technology Services, which provides engineering research and development services, continues to operate as a separate entity. There are no plans to integrate it with the Mumbai headquartered LTIMindtree as of now.

Eye on the top tier

To be fair, LTIMindtree is not the first company to face such challenges. The IT services sector has not seen too many success stories featuring old economy business-backed companies building big businesses.

“There’s a long list of more than 20 traditional conglomerates who never made it big in IT services. TVS, Reliance, the Munjals, ITC, Birlas, Hiranandanis, RPG Group, the Hindujas and others have IT services play, but none, barring the Tata-backed TCS, is in the top tier. If you try to bolt old economy ideas with new hi-tech models, it won’t work,” said the executive quoted earlier.

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Parent L&T has long harboured ambitions to build up its technology services business. The IT arm was founded as L&T Information Technology in 1996. In 2002, its name was changed to L&T Infotech. Between 2009 and 2012, L&T sought to scale up the services arm by attempting to acquire Satyam Computer Services, Patni Computer Systems, and Hexaware Technologies. All three attempts proved unsuccessful. In 2019, L&T acquired Mindtree and started the integration process with LTI in 2022. The acquisition was opposed by the Mindtree founders and became the country’s first hostile takeover of a software services company.

The merged company has now set itself the ambitious goal of getting to $10 billion in revenue. It wants to be part of the top tier and rub shoulders with TCS, Infosys, HCLTech and Wipro. In internal presentations, it sees itself scaling up like the $30 billion TCS, the country’s largest software services firm. This could, however, remain a work in progress unless the parent takes a leaf out of the Tata-TCS playbook and lets LTIMindtree operate without tugging at the reins.

The good news is that the outlook has improved in the wake of last week’s 50 basis points (bps) interest rate cut, the first in four years by the US Federal Reserve. The US is the biggest market for the $250 billion IT services sector. The rate cut is expected to boost spending, notably in the BFSI (banking, financial services and insurance) segment, which accounts for 36.2% of the $4.3 billion LTIMindtree’s business.

“Also, there is this new artificial intelligence (AI) led opportunity, which gives them a chance for a fresh start once internal challenges are sorted out,” said Unearthinsight’s Vasu.

With the interest rate cuts and better business environment, Kotak Securities expects LTIMindtree to record 6.5% business growth this fiscal year (in USD constant currency terms) and 11% next year, compared to 4.4% in 2023-24. This, it says, will be led primarily by BFSI and hi-tech services.

HDFC Securities sees the release of pent-up demand as more supportive of growth visibility. In a note, it said: “Management commentary and BFSI indicators are trending in the right direction.” The brokerage has increased its revenue growth estimates to factor in a BFSI recovery.

View from the C-suite

Sudhir Chaturvedi, director and president, markets, LTIMindtree, believes that the merger is working very well and the company is firing on all cylinders. “The merger was closed and the two organizations were integrated at speed,” he told Mint. Backing his assertion of a smooth integration, Chaturvedi, who joined LTI about eight years ago from Infosys, said, “Clients did not see any disruption, they saw continuity and our client-satisfaction scores are better than before. This shows that the merger has been a success.”

Chaturvedi pointed to three pieces of the merger that he says will pay off. First, the two companies can now build on their strengths to cross-sell and upsell services. The second is the ability to bag large deals. With a bigger balance sheet and the backing of $27 billion parent L&T, the company hopes to get better opportunities to bag big deals.

“I’m personally focused on the $50 million plus pipeline. That itself is over $4 billion now,” said Chaturvedi, referring to the growth in the portfolio of clients bringing in $50 million or more. And the third is closer engagements with vendors such as SAP, ServiceNow, SnowFlake and Oracle.

Brushing aside concerns over cultural differences impacting the future trajectory of the company, Chaturvedi said, “Both companies had a strong ‘client first’ culture. Today, we have the resources, capability and balance sheet of a much larger player, comparable to the top tier. We have the energy, hunger and ambition of a challenger.”

As for the many exits since the integration, Chaturvedi said, “We see it as business as usual. If those exits had an impact, we would have seen it in client disruptions. But the way clients have reacted shows that it’s business as usual. I believe we are one of the strongest teams in the industry.”

A churn at the top

While Chaturvedi has put a very positive spin on the company’s human resources (HR) challenges, the departures may well have impeded the company’s performance. Nearly 20 top-level executives have quit between March 2023 and April 2024. They include Raghavendra Parvataraju, executive vice president, global sales; Pankaj Chugh, head, digital transformations and Google cloud business; Greg Dietrich, executive vice president and head of regional and nearshore delivery.

In about the same period, LTIMindtree made at least 10 key appointments, with three being hired from parent L&T and others from rival services companies, including Cognizant, Infosys and Birlasoft.

Chetana Patnaik, the new HR head, took over in April. Patnaik came to the joint entity from parent L&T. The new chief financial officer (CFO), Vipul Chandra, who joined the same month, is also from the parent company, and was appointed after Vinit Teredesai quit to pursue opportunities outside the group.

While the leadership exits have slowed, chief executive Debashis Chatterjee, who is overseeing the integration, will himself be retiring by the end of 2025. Chaturvedi is one of the two internal candidates believed to be in the running to replace Chatterjee; the other is Nachiket Deshpande, director and chief operating officer.

When Chatterjee calls it a day, his successor will have very big boots to fill. Chatterjee, who came from Cognizant, initially steered Mindtree onto a growth path and has been instrumental in getting the two—LTI and Mindtree—to integrate despite cultural issues.

In July 2023, the National Stock Exchange (NSE) included LTIMindtree in its coveted Nifty 50 index, the flagship index of the NSE. The joint entity commenced trading under its new name, LTIM, from December 2022.

The road to $10 billion

Can the new team get LTIMindtree to the $10 billion revenue mark and steer the company into the top tier?

In the last two years, the joint entity has added just around $700 million in additional revenue. “Ten billion dollars is part of our plan. I will not put a date to it. At L&T, we plan in five-year cycles called Lakshya. We are in Lakshya 2026, which had the merger in the middle,” said Chaturvedi.

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Lakshya 2031 is what the company is looking at for the $10 billion goal. “We are now in execution mode with an AI-led strategy. That is where most of our investments will go,” said Chaturvedi.

LTIMindtree’s AI plan includes what it calls ‘AI in everything’. This is expected to open up new avenues for services, new solutions and new platforms. Currently, the company is doing around 150 AI projects and has upgraded 52,000 of its 81,650 employees to handle AI tasks under its training programme, called Garuda.

Apart from the focus on AI, LTIMindtree sees a mix of organic and inorganic growth getting it to $10 billion revenue. “As we have just been through a big merger, we are now looking at more niche capabilities that will complement our organic growth,” said Chaturvedi.

Changes in the demand environment will be key to LTIMindtree’s plans. The company is banking on discretionary spending increasing in BFSI, telecom, media and manufacturing, energy and utilities, which together account for 70% of the business. Indeed, BFSI, which accounts for 36.2% of revenue, could give LTIMindtree the much-needed tailwind for growth. With interest rates (in the US) going down, consumer confidence is likely to return. It will boost the mortgage sector as well, leading to fresh spending on technology services.

We are now looking at more niche capabilities that will complement our organic growth.
— Sudhir Chaturvedi

“We are entering into an improving macro situation,” said Chaturvedi, pointing to the company’s wins, which include $5.6 billion in new orders in the last four quarters and $50 million plus deals totalling $4 billion. Most of these large deals are in operations, applications and the infrastructure space.

Chaturvedi also emphasized that LTIMindtree is winning deals while competing against the top tier, including the likes of Accenture, Deloitte and the top Indian IT services providers. “You can beat the top tier by being better than them and not by being similar to them,” he said.

If client spending returns, the company’s business will stabilize, Pokharna of Kotak Securities said. “As for the cultural differences, they will eventually be sorted out.