Tech Mahindra Share price: Maintain buy rating with target of Rs 1135

Tech Mahindra has announced a small acquisition of an Ireland-based BPO firm for EUR 21 mn for 70% stake. The pace of acquisitions is consistent with the historic trends and designed for digital capabilities or vertical/geo expansion. A fine balance is necessary between ‘build’ and ‘buy’ decisions; Tech Mahindra has a bias towards ‘buy’, whereas investors at large prefer the former. Tech Mahindra stock is inexpensive; BUY says Kotak Institutional Equities with target price of Rs 1135.
 
Tech Mahindra Acquires Perigord to expand presence in life sciences and extend capabilities in CPG:
 
Tech Mahindra has announced acquisition of Perigord, which provides niche packaging supply-chain BPO services for global clients in the life sciences vertical. Specifically, the firm offers digital workflow and artwork, labeling and BPO services. The rationale behind the acquisition is—(1) to aid expansion in life sciences by providing access to large pharma clients. Perigord has a rich client base consisting of several top global pharma companies.
 

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Tech Mahindra has reasonable presence in healthcare through the HCI Group acquisition but has weak presence in life sciences and to provide services and platform capabilities in packaging solutions, which can be extended to adjacent verticals such as CPG. The purchase consideration is EUR21 mn for 70% stake. The remaining 30% stake will be acquired over the next four years at a valuation linked to Perigord’s financial performance. Perigord’s revenue growth has been healthy in the last couple of years and does not seem to have been impacted much by Covid.
 
Attributes similar to other recent acquisitions:
 
The Perigord acquisition has characteristics similar to other acquisitions in the last couple of years:
 
(1)     acquisition for competencies in next-gen areas or expansion in verticals/geos
(2)     manageable in size and inexpensive
(3)     largely in the enterprise vertical
 
Tech Mahindra has gaps in offerings in the enterprise vertical, Kotak Institutional Equities prefer organic buildup of capabilities although the company prefers an easier route of acquisition.
 
Processes involved in integration and driving synergies are also logical:
 
(1)     Tech Mahindra allows acquired entities to operate under own brand with a fair degree of independence with scope for cost synergies
(2)     Tech Mahindra has increased focus on creating and selling integrated solutions combining both in-house offerings and acquired competencies
(3)     incentives based on synergy benefits align managerial interests with that of Tech Mahindra.
 
Kotak Institutional Equities do not have sufficient data to comment on the success of individual acquisitions. There have been a few encouraging signs that have been highlighted by the management. For example, Tech Mahindra won a multi-year IT infra outsourcing deal with a large healthcare provider leveraging HCI’s capabilities and Tech Mahindra service offerings. However, many acquisitions have struggled as well.