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Research
Tech Mahindra - HGS acquisition to boost revenue visibility and EPS - BRICS
Posted On : 2012-09-05 10:35:07( TIMEZONE : IST )
- TECHM acquired HGS for US$87.1mn, which has US$160mn in revenues, US$20mn in net cash, and mid-teen EBITDA margins
- Deal includes a US$845mn business commitment and TECHM is likely to fund it using combination of debt and internal accruals
- Estimate incremental EPS accretion of Rs3 in FY13 and Rs5 in FY14. Raise target to Rs840. Maintain Add.
Tech Mahindra (TECHM) acquired Hutchinson global services (HGS) in a US$87.1mn deal. HGS has 11,500 employees across Mumbai and Pune and provides BPO services (mostly voice-based lifecycle CRM) to UK, Ireland and Australia-based clients.
EPS accretive deal for TECHM: HGS has annual revenues of US$160mn with EBITDA margins in "mid teens". Deal offers revenue and margin visibility as it includes a business commitment worth US$845mn over 5 years with margin stability at current levels. We estimate incremental EPS of Rs3 for FY13 and Rs5 for FY14 assuming 2/3 rd funding of the deal value through new debt.
Deal structure in line with other "client-vendor" deals in India: We believe TECHM's deal with HGS is the latest in the line of deals, in which clients are selling their India captives to service providers and the deal structure is quite similar to previous ones. Earlier examples are UBS' and Cognizant's US$75mn deal including US$442mn business commitments over 5 years, and Citigroup's and TCS' US$505mn deal, which includes US$2.5bn business commitment over 9.5 years.
Deal boosts TECHM's capability in the managed services space: We believe HGS' deal fits TECHM's effort to drive growth through wider services across BPO and managed services in a cost-savings-focused demand environment.
Valuation and outlook: The stock trades at 13x FY13 and 10.7x FY14 on our core earnings (excluding Satyam). We raise FY13/14 core earnings estimates by 4.8/7.2% to factor in HGS' acquisition. We raise target to Rs840 (from Rs790) assigning (unchanged) P/E of 12x to our average FY13-14 core net earnings. Maintain ADD.
