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Moneycontrol Pro Panorama | Deal pipeline is buzzing, is there a jarring note?

In today’s edition of Moneycontrol Pro Panorama: Demand worries for UltraTech, SME IPOs the talk of the town, infra in a sweet spot, the margin call and more

January 18, 2022 / 03:18 PM IST
Representative image

Representative image


Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

Investors gave a mixed response to Tech Mahindra’s (TechM) latest acquisitions. The stock dropped 2 percent in Tuesday’s trade after the company said it is acquiring a 100 percent stake in Com Tec Co IT (CTC) for a total consideration of Euro 310 million ($350 million). The target company provides digital solutions and engineering services for the insurance industry. Additionally, TechM is purchasing minority stakes in two InsurTech platforms.

TechM will pay Euro 210 million upfront in cash for CTC. The remaining Euro 100 million would be paid over the four years as earnouts and synergy linked payouts. The total acquisition price amounts to 3.9 times 2021 annualised revenue, which is decent, given CTC’s industry- leading profit margins and its presence in a fast-growing business segment.

“CTC had an approximate annualised revenue of Euro 78 million in calendar 2021, implying a price-to-sales multiple of 4X, which is extremely reasonable for a digital company with industry-leading operating margin and no debt on its books,” writes Madhuchanda Dey in today's edition.

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TechM plans to leverage CTC’s domain knowledge and delivery centres in Latvia and Belarus. The company plans to pitch CTC’s services to its clients and across the business verticals. CTC will strengthen TechM’s insurance capabilities and aid the banking financial services and insurance (BFSI) segment, whose annual revenues are inching towards $1 billion.

Yet, everybody is not as enthused, as seen by the mixed reaction from investors. One, revenue growth at CTC moderated to 10.3 percent in 2021 from a compound annual growth rate of 39.3 percent in 2018-20, contrary to the strong demand trend narrative in IT. CTC has high client concentration, deriving 60 percent of its revenue from an anchor client. TechM plans to change this by investing in sales and marketing, broadening CTC’s client base.

Another niggle is TechM’s growing appetite for acquisitions. This is the 10th investment this year. It is the largest acquisition in almost a decade, point out analysts at Jefferies India. Acquisitions are inevitable in the fast-evolving technology world. Major IT services companies regularly acquire smaller firms to fill service gaps.

But TechM is spending a considerable amount of money on acquisitions. The company has spent about $850 million (deal values) on acquisitions so far this fiscal, higher than in earlier years, calculations by Kotak Institutional Equities and Jefferies India show. The rising outflows can raise questions about TechM’s cash utilisation, warn analysts at Kotak. “The success of these acquisitions needs to be watched over time,” add analysts at Investec Securities.

More investing insights from our research team

UltraTech – Demand hits a soft patch in Q3

Jubilant FoodWorks: To emerge stronger from near-term disruptions

What else are we reading?

Economic Recovery Tracker | Mobility rebounds, but consumption slips

Learning to live with the virus

SME IPOs is where the real action was in 2021

Chart of the Day | India's growth stable, others slow, show OECD leading indicators

HCL Tech's weak margins show cost structure a key differentiator for IT stocks

Crypto Conversations: Why cryptocurrency theft soared in 2021 and what lies ahead

Budget Chart of Day | Big bucks for infra

Sustainable funds face threat from tech sector turmoil (republished from the FT)

Budget 2022 | General government deficit to ease to 9.3% of GDP in FY23

Technical picks: Bajaj FinanceDLFEIH and Balaji Amines (These are published every trading day before markets open)

R Sree Ram

Moneycontrol Pro

 



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R. Sree Ram
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