Mahindra Satyam - Acquisition Update - Consortium

Mahindra Satyam (MSAT) on Friday, Feb15th ,acquired 51% equity stake in Complex IT (CIT), one of the largest SAP consulting providers in Brazil. In an all-cash transaction, the management expects to pay a maximum of US$23m, including an upfront payment of US$6.5m, over the next 18-24 months. MSAT also has the option of increasing its stake to 100% post the 18-month period.

Acquisition rationale

- Brazil is the second-fastest growing market for SAP AG (~US$1bn opportunity).
- MSAT gets exposure to the US$36bn IT services market in Brazil.
- Enhances presence in LatAm (MSAT's current revenues from Brazil, ~US$10m).
- CIT's focus areas, Enterprise Solutions & Manufacturing, are MSAT's strengths.
- A step towards US$5bn revenues for the merged entity (TechM-MSAT) by 2015E.

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We believe inorganic expansion would play a dominant role in achieving the management's aspirational revenue target of US$5bn by 2015. The recent acquisitions are part of this strategy which would also help diversify operations both geographically and in terms of industry vertical. Also, CIT would provide cross-selling opportunities and a chance to gain share in the US$36bn Brazilian IT services market. Despite strong ~45% outperformance over the past year, MSAT is currently trading at undemanding valuations of ~9x FY14E EPS. We believe healthy revenue growth and sustained EBIT margins will continue to drive a gradual PER re-rating. Reiterate Outperformer, with a 12-month price target of Rs145.

Source : Equity Bulls

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