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Business News/ Markets / Mark To Market/  Mphasis stock hits new high as Street cheers Blink acquisition
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Mphasis stock hits new high as Street cheers Blink acquisition

Mphasis acquired US-based Blink Interactive for a consideration of $94 million to be paid in cash, along with talent retention cost over the next two years

The August inflow numbers for equity mutual funds also mark the 17th straight month of inflows into equity schemes. Photo: iStockPremium
The August inflow numbers for equity mutual funds also mark the 17th straight month of inflows into equity schemes. Photo: iStock

The Street has given a thumbs-up to Mphasis’ new acquisition even though it may lead to some impact on the company’s margins.

Continuing its up move, shares of the tier-II IT services provider hit a new record high of 3,324 in Thursday’s opening trade on the NSE. The Mphasis stock has been rising after it announced the acquisition of US-based Blink Interactive, a user experience research and design firm, on Wednesday. The consideration for this transaction stands at $94 million to be paid in cash, along with talent retention costs over the next two years.

This acquisition is attractively valued and Blink’s cross-sell synergies would accelerate growth within Mphasis’ BFSI and hi-tech verticals, analysts said.

"Acquisition of Blink provides Mphasis an opportunity to add to its front-end design capabilities and engineering-related work, and also capture more downstream revenue opportunities, which in many cases is around 10 times of upstream revenue. This perfectly aligns with Mphasis’ Front2Back transformation strategy," analysts at Motilal Oswal Financial Services Ltd said in a report on 22 September.

It should be noted that Blink has a marquee customer base in the Hi-Tech industry; its client list includes Facebook, Amazon, Microsoft, and Google.

“Though Blink’s revenue is currently only 2.7% of Mphasis revenue, this acquisition offers significant growth opportunities," said analysts at Prabhudas Lilladher. “Revenue growth is accretive given Blink has grown at over 42% CAGR over FY17-20 years and strong market synergies with Blink will expand Mphasis addressable market share," added the report. CAGR is short for compounded annual growth rate. Blink’s estimated revenue for CY21 is USD30-35 million.

On the flipside, given the higher amortisation and retention costs, the Mphasis management has guided for an impact of around 100 basis points (bps) on its margin. One basis point is one-hundredth of a percentage point.

The management expects early realization of revenue synergies to pare margin headwinds. However, even after taking into account this acquisition, the Mphasis Ebit margin guidance of 15.5-17% remains unchanged. Ebit is short for earnings before interest and tax. Analysts say, the management’s confidence to protect margins is impressive and bodes well for investors’ sentiment towards the stock.

That said, analysts at Kotak Institutional Equities highlight that successful integration of the two businesses would be key to realizing revenue synergies. “Integration of creative agencies with services firms is tricky and requires care due to differences in cultures," said the Kotak report dated 23 September.

Meanwhile, in the last year, the Mphasis stock has jumped 135%, significantly outperforming benchmark index Nifty IT, which has given returns of 84% in the same span. This sharp rally has been driven by the company’s robust earnings performance and strong growth momentum in its organic business. In the June quarter, Mphasis signed net new deals worth $505 million, the highest ever in Q1.

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Published: 23 Sep 2021, 10:20 AM IST
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