The information technology arm of Mahindra group, Tech Mahindra, on Thursday made the biggest overseas acquisition by entering into a definitive agreement to acquire 100 percent of US-based network solutions company Lightbridge Communications Corporation (LCC) for USD 240 million.
Vibhor Singhal of Phillip Capital said the deal is an overall positive for the company as the acquisition is attractively priced. Phillip Capital’s current target price for the stock is around Rs 2820, but its 12-month price target is around Rs 3000.
Below is the transcript of Vibhor Singhal’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Sonia: You have got plenty of time to analyse and digest this deal, how would you approach the Tech Mahindra stock today?
A: Overall, it is positive news for the company. If you look at the acquisition it is quite attractively priced at 0.5 times EV/sales or 7x EV/EBITDA. I think it is not an expensive proposition that the company has got into and at the same time it adds around USD 430 million of revenue straight away to the topline of the company. So, you are essentially adding USD 430 million of revenue for the acquisition cost of around USD 200-220 million.
The margins for the company are much lower than what the profile of the company is but overall there are multiple margins levers which can be utilised over the next few years which can spruce up the margins close to the company level. So, overall we remain positive on the company as a whole and view this acquisition also on the positive light.
Latha: What happens immediately to the stock, a bit of EPS dilutive move isn’t it; I guess it gets accretive a little later, maybe after a year or so?
A: First year it will be marginally EPS dilutive to the extent of minus 0.2-0.5 percent. So, not a huge dilution per se. Similar impact on the positive side is expected in FY17 that is the second year of the integration of the acquisition. So, a marginal negative in that sense but the positive part is it definitely takes the company closer to its stretched goal of USD 5 billion by FY16.
Secondly, if you see the company has now raised the entry barrier for other companies in the network services management space. So, this is developing very high derivative capability in that space and that will take the stock to higher levels.
Sonia: What would your 12 month target price be on the stock?
A: Right now our price target is around Rs 2820 but our 12 months price target would be around close to Rs 3000.
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