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

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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.

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 10^th 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.

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