Tech Mahindra Ltd’s shares have risen smartly in the past three-and-a-half months after having languished for over two years. The shares have risen by 36% since end-May, soon after the company reported its annual results.

Investors liked the company’s decision to merge with Satyam Computer Services Ltd—particularly the merger ratio, which is slightly in the parent firm’s favour. And while revenue growth has continued to be sluggish in the past two quarters, profit margins have risen owing to the weakness of the Indian currency as well as cost rationalization. While this has led to some earnings upgrades, revenue growth has remained a concern.

In the past two quarters, for instance, Emkay Global Financial Services Ltd has cut its FY13 and FY14 dollar revenue estimate for the company by 5.6% and 5.5%, respectively. Its rupee earnings per share (EPS) estimates, however, have been increased by 12.4% and 16%, respectively.

But now Tech Mahindra appears to be aggressively tackling the revenue growth concerns. Earlier this week, it announced the acquisition of a captive business process outsourcing (BPO) unit called Hutchison Global Services Pvt. Ltd for $87.1 million ( 487 crore today). Hutchison Global has 11,500 employees servicing clients in the UK, Ireland and Australia, making it one of the largest captive BPO units in the telecom domain. With this acquisition, which will add around $160 million in revenue annually, Tech Mahindra will become one of the largest BPO operators in the country. Additionally, it will reduce its reliance on its top client BT Group Plc, which has been a drag on its overall growth in the past few years.

What’s more, analysts estimate that the deal will be EPS accretive, since Hutchison Global’s profit margins are in the mid-teens and the company expects to maintain profitability at current levels. In a report dated 5 September, Emkay Global Financial has increased its revenue and profit estimates to account for the impact of the Hutchison Global transaction.

Revenue estimates for FY13 and FY14 have been increased by 2.5% and 13.2%, respectively, and earnings estimates have been increased by 4.4% and 5.8%, respectively. The brokerage firm added in a note to clients, “We highlight that Tata Consultancy Services Ltd’s (TCS’s) acquisition of Citigroup Global Services Ltd in October 2008 has worked very well for the company (with Citigroup now a $700 million per annum client for the company versus approximately $200 million back then). If Tech Mahindra is able to replicate what TCS has done with Citigroup BPO buyout, this inorganic move would end up being a good buy for the company." But it also cautions that Wipro Ltd has had limited success with a similar transaction.

With Tech Mahindra’s valuations already having risen sharply, the onus will now be on it to deliver on revenue and profit growth expectations.

Close