Pininfarina to up design ability, won't harm margins: TechM

Investors should not be worried about Tech Mahindra's recent acquisition of loss-making Italian car design Pininfarina, says its CEO CP Gurnani, who adds that the buyout will up the design capabilities of India's fourth-largest technology-services company.

The company recently announced it would, along with group company Mahindra & Mahindra, buy 76 percent in the Italian company (Tech M would hold 60 percent in the special purpose vehicle that would acquire the stake while M&M would hold the remaining 40 percent). However, analysts had warned that the 25-million euro buyout may have some impact on the IT firm's margins.

However, in an interview with CNBC-TV18, Gurnani termed Pininfarina a "great asset" and said turning it around would not be a problem for the company. "Making it EPS-accretive will be a short journey for Tech Mahindra," he said.

"Overall, we expect to see a healthy improvement in Tech Mahindra margins by the time the deal is struck," he said, allaying market concerns over margins that had weighed on the stock recently.Below is the transcript of CP Gurnani’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: Why this purchase? It has created a lot of unease among the investor community that you have participated in something which is not directly of benefit to Tech Mahindra.A: I would like to say that Tech Mahindra is a trail blazer. Tech Mahindra is trying to bring in a focus which I think all the users around the world have already defined it, that design styling and customer engineering or customer experience goes hand-in-hand with engineering. You know that for Tech Mahindra, engineering is a very strong practice, we have about 11,000 engineers, working around the globe on mechanical engineering, one electrical and electronics. I think his capability of styling adds to not only our capabilities but, also to be able to provide end to end capabilities to our customers. The only reason probably we need to explain it a little more is because up till now, Pininfarina, lesser known part of their business is the non-automobile business. They not only do styling and design engineering for automobiles in all the leading brands, but they also provide design architecture services to a lot of other industrial appliances and to various other businesses. So, it is primarily a design house and what we have done is integrate design and engineering.Sonia: I take your point that this will help expand your engineering capabilities quite a bit, then why did you go in for just a 60 percent share for Tech Mahindra particularly? Why not a 100 percent share?A: I think it is just because of the historical reasons. Number two is that the domain expertise – so three parts to it. Number one is the original conversation had started by Mahindra Engineering Services. Mahindra Engineering Services was then part of Mahindra. So, there was a fair amount of momentum and velocity for Mahindra Engineering Services and Tech Mahindra acquired Mahindra Engineering Services. Number two was that, I think from a Mahindra and Mahindra were keen from an investment perspective and wanted to invest in Pininfarina and frankly I think, to us it was not a real big debate because to some extent, it only helped because they brought in a certain level of domain expertise. Sonia: The problem I think is that there was a lot of expectations that your margins would recover to some of your peers’ levels in the quarters to come. But, now by acquiring a loss making company like Pininfarina, your blended margins may perhaps get impacted some more. So, can you just quantify for us what exactly the impact would be on blended margins going ahead?A: One is this acquisition. By the time it is financially closed, we are now talking of approximately April-May of 2016. So, number one, I do believe that Tech Mahindra, whatever operating levers and whatever recovery plans we have, we would have progressed reasonably well. Number, two is that fundamentally, it is a great asset. And I do not see the turnaround to be a big activity here. It is a less than USD 100 million asset in terms of revenue and my personal belief is with the kind of customer positive response I am getting, bringing it into clearly making it earnings per share (EPS) accretive, bringing the earnings before interest, taxes, depreciation and amortisation (EBITDA), making it better would be a very short journey.Latha: Actually, the other question I had, are you not walking in many directions? You have got a payment bank licence. That would require a significant amount of money and technology investments. Why not an acquisition that will get you closer to a fruition of that business? This seems to be opening a new line of business. Or are you planning any acquisitions that we should know of in the payment bank space?A: For payment bank, you will know that we already have the technology. We have been serving customers around the globe with our mobile wallet and with our payment bank and digital bank technology. All we are doing is that moving in the direction of brick and clay and which will be a separate subsidiary. Today, we strongly believe that if we do not do a brick and clay as a part of our strategy, we are not participating fully in the digital transformation. My aim is to convert Tech Mahindra from an IT company to a DT company, which is information technology to a digital technology company. And I do need to not only participate in by doing things for other, but I strongly believe that by this relatively smaller investment, we are not only proving to the world that we can provide technology, but we can also help in running the operation. So, it all form of a well-thought out design and personally, I do not think we are getting distracted. I think what we are doing is we are creating a company for the future.Sonia: Can you just leave us with one number? We have got a lot of qualitative views from your end, but you did mention that the margin recovery for the business would progress well by the end of this deal. What do you mean by progress well? From the 12-13 percent levels, currently, how much can we expect the margins to grow to?A: I do not want to be preventive at this stage. At the time of the closing, I promise you that I will share every piece of the details, but, overall, my level of confidence on improving this asset and being able to get the synergy benefits out of this asset is reasonably high.