Tech Mahindra exit makes biz sense for BT

Tech Mahindra exit makes biz sense for BT
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First Published: Sat, Aug 30 2008. 12 27 AM IST

Updated: Sat, Aug 30 2008. 12 27 AM IST
Communications services company BT Group Inc. might be thinking about in-sourcing its Indian outsourcing. The UK telecom operator is mulling the sale of its 31% stake in Tech Mahindra Ltd, according to the Financial Times newspaper.
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The possibility raises a simple question. Why would BT, whose own growth is stalling, sell out of a software services joint venture whose profits have tripled in the last three years?
With debt of only two times next year’s expected earnings before interest, taxes, depreciation and amortization (Ebitda), the telecom operator isn’t strapped for cash. It has vowed to roll out a high-speed fibre network across the UK, but only if the regulator allows a healthy return. Besides, BT’s share of India-listed Tech Mahindra, which has a market capitalization of $2.2 billion (Rs9,636 crore), would only cover one-quarter of the proposed fibre investment.
What’s more, Tech Mahindra needs BT. The two have worked closely together on various projects for the past 20 years. The joint venture, 44% owned by conglomerate Mahindra and Mahindra Ltd, still gets around 65% of revenues from BT.
BT isn’t saying anything, but one theory is that this happy partnership may eventually be unnecessary for the British operator’s Indian ambitions. In the two years since Tech Mahindra was listed, BT has been scaling up its Indian presence: it acquired a licence to provide fixed-line services and bought i2i Enterprise Pvt. Ltd, a small Internet protocol services group. BT, which refers to India as a future crown-jewel, could eventually do what Tech Mahindra does itself.
If selling is the goal, then it might seem odd that BT recently awarded Tech Mahindra two large, five-year contracts worth $1.7 billion. Without these, though, any sign of a BT exit would adversely affect Tech Mahindra’s value.
Speaking of value, this might not be a bad time to sell out of Indian outsourcing. BT would book a handsome profit and the sector has recently shown signs of slowing. Investors are questioning the sustainability of recent growth rates.
Tech Mahindra’s shares, like those of its rivals, are selling at around half the price-earnings ratio of a year ago. BT might be thinking of getting out while the going is still good.
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First Published: Sat, Aug 30 2008. 12 27 AM IST