Analysts upbeat on Tech Mahindra's latest acquisition

Moneycontrol NewsInvestors cheered Tech Mahindra's latest acquisition as the stock rose over 2 percent intraday. The IT giant announced the purchase of US-based CJS Solutions Group at an enterprise value of USD 110 million. CJS Solutions conducts business as The HCI Group. The company will provide IT services to the healthcare provider. The deal is likely to be closed by April 2017. As part of it, Tech Mahindra will be paying USD 89.5 million upfront for 84.7 percent stake in the firm. The remainder stake will be purchased over the next three years. Additionally, there is a contingent consideration of USD 130.5 million that is payable over three years. On financial front, HCI Group has a TTM revenue of USD 114 million as of September 2016 with high single digit margins. Analysts have given the deal a thumbs up, citing appropriate valuations as one of the reasons. Credit Suisse has maintained its outperform rating on the stock. The research firm feels that the buyout will help the IT giant scale up its healthcare vertical and there could be cross-selling synergies. This should help it improve the local US employee mix as well, which currently stands at 35 percent. Morgan Stanley also concurs with the view on cross-selling. "HCI Group works with a majority of the US top hospitals, and TechM could try to cross-sell some of its other services," it said in a report. The research firm has an overweignt rating on the stock with a target price of Rs 545.On the valuations front, it feels that the company is an attractive fit given its reasonable valuations and as it is a complementary fit. Bank of America Merrill Lynch (BofA-ML), meanwhile, feels that the deal valuation appears to be in line with the industry trend. It has given an underperform rating on the stock with a target price of Rs 499.95.However, Credit Suisse has also highlighted its impact on earnings. It believes that the acquisition will be earnings neutral or be very slightly accretive.UBS, meanwhile, feels HCI Group will add to revenues of Tech Mahindra. “Based on the revenue run rate as of September 2016, CJS Solutions Group will add 2.4% to Tech Mahindra's USD revenue growth in FY18E, assuming the deal closes by the end of April 2017,” the research firm said in a report. The brokerage house maintains a buy call on the stock with a target price of Rs 585. “As mentioned in our recent upgrade note, we believe a continued recovery in large telecom clients and margin improvements offers scopes for upsides,” its report added.