Accumulate Tech Mahindra; target of Rs 860: Emkay

“Tech M has acquired 100% stake in Hutchison Global Services (HGS) for a total upfront payment of US$ 87 mn.( EV of US$ 67 mn as the acquired entity has cash of US$ 20 mn) As part of the transaction, Tech M would take over 11.5 k employees and delivery facilities in Mumbai and Pune. HGS provides customer lifecycle operations to clients in UK (60% of revenues), Australia (30% of revenues) and Ireland (10% of revenues) .As part of the transaction; Tech M is assured revenues of US$ 845 mn over 5 yrs from HGS’s clients. Deal valuations are at 0.5x Sales and the transaction would be EPS accretive(assuming 15% EBITDA and 10% Profit margins even if the entire acquisition were to be funded by debt).” 

“In our view, this acquisition will (1) scale up Tech M's international BPO operations (from 3k currently) , (2) increase footprint within Hutch and an opportunity to sell to Hutch's operations in other geographies and (3) an opportunity to cross sell similar services to other clients. We believe that this transaction is akin to captive buyouts by peers like TCS, Wipro and Cognizant in recent yrs. We highlight that while TCS’s acquisition of Citigroup Global Services in Oct’2008 has worked very well for the company (with Citigroup now a US$ 700 m.n p.a client for the company V/s ~US$ 200 mn back then), Wipro has had limited success with a similar transaction. Thus in our view, if TechM 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”

“We incorporate the impact of HGS’s acquisitions into our earnings estimates (assuming a 15% EBITDA margin, in line with management’s guidance of mid teens margin outlook and a 10% PAT margin for the acquired entity along with a 10% interest on borrowing of ~US$ 67 mn) driving a 4/6% raise in our standalone earnings for Tech M and a 1.8%/2.5% increase in our pro-forma earnings for the Tech M/Mah Satyam combine. We retain accumulte on Tech M/Mah Satyam with revised TP of Rs 860/97 respectively,” Emkay Global Financial Services research report.

Public holding more than 90% in Indian cos

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