By next week Larsen & Toubro (L&T) is believed to merge its IT business services unit, L&T Infotech (LTI) and Mindtree, into a $ 22 billion firm, amid the strong growth momentum which is on the back of digital transformation in the Indian IT sector.

After the news broke, shares of L&T Infotech were trading at Rs 5,838.55 , down 3.12 percent at around 02:45 pm on BSE, and shares of Mindtree were trading at Rs 3,950.70, down 3.57 percent.

The merge is expected to result in cost synergies from admin costs like HR dropping down for both companies. It has business synergies as both have complementary portfolios, for instance, Mindtree has bigger focus areas on communications media and technology, retail, consumer packaged goods, and manufacturing.

As for LTI’s larger focus verticals, it is banking and financial services, and insurance, with over 32 percent and 13 percent of revenue, in the third quarter of 2021-22.

It is yet to be known who will be leading the merged entity, whether it is Mindtree CEO and Managing Director Debashis Chatterjee or L&T Infotech CEO and Managing Director Sanjay Jalona.

The merged entity is expected to capture market capitalization of over $22.05 billion (Rs 1.68 trillion), including a combined revenue of $3.5 billion, making it the sixth largest IT services player from India.

Additionally, it ties in with the group’’s vision of becoming more services oriented.

However, the merger buzz did not sit well with the market, as both firms' stock values dropped. At the close of trade, Mindtree stock was down 3.33 percent to Rs 3,960.8 per share, while LTI stock was down 2.66 percent to Rs 5,866 per share.

Mindtree's revenue in FY21 was $1.07 billion, whereas L&T Infotech's was $1.67 billion. Both companies have seen a 30.2 percent and 25.3 percent increase in dollar revenue, respectively. Mindtree's FY23e PE is 88 percent, whereas L&T Infotech's is 44 percent.

The merger, according to analysts, is coming at an inopportune time.

“A merger of these two entities is a foregone conclusion. Given the growth momentum these companies are witnessing, a merger at this time may not be sensible as it would defocus the management from capturing growth to managing merger complexities,” says Pareekh Jain, founder and chief executive officer, Pareekh Consulting — an engineering consultancy services firm.