Tech Mahindra's CTC acquisition doesn't excite the Street
This acquisition and its stake in two platforms are poised to boost Tech Mahindra's presence in the insurance vertical. But the Street is not too enthused about it. Reacting to the development, shares of company fell around 1.2% on the National Stock Exchange in opening deals on Tuesday
Tier-1 IT services provider Tech Mahindra Ltd which is on an acquisition spree has bought an east European IT services company Com Tec Co IT (CTC) for EUR310 million, which caters to clients in the insurance vertical. Tech Mahindra has also purchased a minority stake of 25% in two insurance technology platforms called SWFT and Surance for EUR20 million.
In a call with analysts, the management said CTC has industry-leading earnings before interest and tax ( Ebit) margin and will be accretive on an earnings per share, free cash flow and return on equity basis. In CY18/CY19/CY20, CTC had a revenue of EUR36.6 million/EUR57.6 million/EUR71.3 million, respectively, the management said.
This acquisition and its stake in two platforms are poised to boost Tech Mahindra's presence in the insurance vertical. But the Street is not too enthused about it. Reacting to the development, shares of company fell around 1.2% on the National Stock Exchange in opening deals on Tuesday.
Some analysts feel that this acquisition will not move the needle on Tech Mahindra's earnings. "The acquisition will strengthen TechM's digital engineering capabilities and scale up its European presence with the addition of over 700 skilled IT professionals. Given the size of the acquisition (<2% of Tech Mahindra's revenue), we do not expect any meaningful revision to our earnings estimates," analysts at Emkay Global Financial Services Ltd said in a report on 17 January.
Some others point out that so far in FY22, this is Tech Mahindra's 10th acquisition with a total cash outlay of around $880 milion, which is higher than in the previous few years, and, thus, not comforting.
"Tech Mahindra's portfolio has gaps in capabilities which necessitate mergers & acquisitions (M&A). We are fine with the acquisition philosophy but not comfortable on pace of acquisitions," analysts at Kotak Institutional Equities said in a report. The report added that Tech Mahindra is leaning even more towards buy whereas investors prefer build and the acquisitions of Allyis to boost client profile is a good example.
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