Moneycontrol Bureau
Analysts are positive on the Tech Mahindra and M&M joint deal to acquire Italian automotive design company Pininfarina for about euro 53 million. A special purpose vehicle (SPV) is created by both the Mahindra companies with Tech Mahindra holding 60 percent stake in it.However, questions are raised about Tech Mahindra’s involvement in the deal. Though Credit Suisse has an outperform rating on Tech Mahindra, it is concerned whether M&M’s requirements are driving this acquisition decision to some extent. As per its estimates, the deal is likely to have slightly dilutive impact on Tech Mahindra's EPS (less than 1 percent), given Pininfarina is making losses at PAT level. Tech Mahindra had net cash of USD 400 million as at 30 September 2015.
Credit Suisse thinks Tech Mahindra’s involvement is somewhat of a surprise. "It is not clear if Tech Mahindra always intended to be a party to this acquisition. Tech Mahindra had earlier also participated in the payment bank license for the group though the investment there was quite small. Tech Mahindra is one of our top picks in the sector given the prospects of telecom business bottoming out, possibility of margin expansion and attractive valuation,” it says in a note.
Deutsche Bank has buy rating on both Tech Mahindra and M&M with target price of Rs 543 and Rs 1500 per share respectively.
"While the deal metrics appear high, we note that that M&M is acquiring the company to enhance its future product launch pipeline through the design and engineering capabilities of Pininfarina. M&M’s cash outflow for the acquisition would be at Euro 21 million. This compares with its annual net profit of Rs 3000 crore and net cash of Rs 100 crore at the end of FY15," it says.
Deutsche Bank feels the acquisition would complement Tech Mahindra's existing engineering capabilities and would allow them to pursue a larger market pie.
However, though Kotak has a add rating on Tech Mahindra with a target price of Rs 630 per share but thinks Pininfarina acquisition is not the best buy decision for the IT company.
Kotak says that it would have been better if Tech Mahindra had put its cash to acquire capabilities in the digital or financial services domain, instead. "This acquisition, although small, combined with recent foray into payments bank is not an optimum utilization of cash in our view," it adds.
Kotak also says that Tech Mahindra needs to be prudent on cash management or else it will risk losing investor confidence in capital allocation decisions. "Delays in deal closures would work against Tech Mahindra in the short term; else we like Teh Mahindra’s leadership in the telecom vertical and solid positioning in the manufacturing vertical. Valuations are inexpensive and risk reward is attractive," it elaborates. Pininfarina provides engineering design services and some spares to automakers such as BMW, Ferrari, Peugot, Fiat, GM, Alfa Romeo and Maserati. It has been loss-making for past few years has undergone debt restructurings.At 11:50 hrs Mahindra and Mahindra was at Rs 1,292.50, up Rs 5.50, or 0.43 percent while Tech Mahindra was at Rs 533.15, down Rs 9.55, or 1.76 percent on the BSE.Posted by Nasrin SultanaFollow @NasrinzStory
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