L&T may raise Mindtree stake to 26%,  get a hefty dividend

Larsen and Toubro Ltd on Tuesday formalized its stake purchase in Mindtree Ltd from Café Coffee Day (CCD) founder V.G. Siddhartha and two CCD affiliate firms for ₹3,218.32 crore and is now looking to buy at least 6% more from the open market within a week.

A 26% stake in Mindtree will entitle L&T to get a dividend income of ₹102 crore.

Two people with direct knowledge of the development confirmed this, adding that L&T has started its open market purchase of Mindtree shares on Tuesday and is hoping to cross its basic target of acquiring at least 26% within a week.

On 18 March, L&T, after declaring its plan to buy the 20.4% stake held by Siddhartha and his two CCD affiliate firms, announced its intent to launch an open offer to buy an additional 31% in Mindtree. L&T also said it would buy 15% stake in Mindtree separately from the open market.

The open market purchase began on Tuesday.

“In the next one week, L&T should be able to complete buying the crucial 26% stake in Mindtree. Shares will be bought at a price of up to ₹980 apiece or lower, depending on the price movement," said the first person.

On 18 April, Mindtree, while declaring its annual results, announced a special dividend of 200% and a final dividend of 40% on every share at a face value of ₹10 each for every shareholder of Mindtree. Separately, Mindtree has announced an interim dividend of 30% for all shareholders. However, since L&T’s stake purchase falls on a day beyond the record date for the interim dividend, L&T will not be entitled to receive any interim dividend.

The special and final dividend payout is subject to a shareholder approval in an annual meeting that is scheduled to happen in July. The record date for these dividends hasn’t been announced yet and if L&T manages to buy the planned 35.4% stake (20.4% stake of Siddhartha and 15% from open market) in Mindtree before the record date is announced, L&T will be eligible to earn a dividend of ₹139 crore.

Finally, if L&T succeeds to end up with a total 66.4% stake in Mindtree after the open offer, the engineering firm will be eligible for a total dividend income of around ₹260.5 crore. L&T’s open offer for Mindtree will begin on 14 May and close on 27 May.

On Tuesday, in an early morning bulk deal during the market hours, L&T bought 20% of the stake held together by Siddhartha, Coffee Day Enterprises Ltd and Coffee Day Trading Ltd. Following the stake sale, Siddhartha and his two firms are left with around 0.41% stake and L&T has emerged as the largest stakeholder in the Bengaluru-based IT firm, whose promoters have been resisting a change of guard ever since L&T announced its intent to acquire control of Mindtree on 18 March.

“The remaining stake of Siddhartha and his firms will also be purchased in a day or two, which will make Siddhartha earn around ₹3,270 crore. The money will be used to repay the debt to Standard Chartered with which Siddhartha’s shares are pledged. Around ₹2,900 crore will be used to pay Standard Chartered to release Siddhartha’s shares from encumbrances. Rest of the money too will be used to repay some of the debts taken by Coffee Day Enterprises and Coffee Day Trading," said the first person.

“Siddhartha and his firms have also got a clearance from the Income Tax department required under section 281, which will enable a transfer of the entire 20.4% stake to L&T," said the second person.

Section 281 of the Income Tax Act requires a tax assessee to secure approval of the assessing officer before creating a charge on or transfer of certain assets.

About a fortnight ago, right after announcing the dividend payout, Mindtree CEO Rostow Ravanan had said, “This is in no way done with an expectation to change the price." But, ever since the dividend payout announcement, Mindtree’s stock price has been rising. The stock jumped from ₹969.1 apiece on 18 April to ₹988.85 a share on 25 April. On Tuesday the stock closed up 0.52% at ₹980.30 on BSE.

After Mindtree announced its dividend plan, Ravanan had said, “The AGM is in July—and will take place after the open offer begins—so (it) shouldn’t have an impact. We haven’t done anything with an intention of influencing the price or anything like that. Moreover, dividend payment will only be done post the AGM in July (after approval), which will be after another quarter—and more cash flow would have come into the system."

The dividend payout, if cleared by shareholders, will be the highest ever dividend paid by Mindtree since its inception two decades ago. Mindtree currently has around ₹256.2 crore in cash and cash equivalents and ₹3,141.9 crore in reserves and surplus. The dividend will be paid out of this money.