Tech Mahindra share price gains on acquisition announcement; brokerages maintain 'buy'

Tech Mahindra share price rose 1 percent in the early trade on January 18 a day after the company board approved acquisition of Com Tech Co IT.

Tech Mahindra through its wholly owned subsidiary viz., Tech Mahindra London Limited approved the proposal to acquire 100 percent equity shares in Com Tec Co IT and 25 percent equity shares each in SWFT Technologies Ltd. and Surance Ltd, company said in its press release.

Tech Mahindra will pay total consideration of up to EUR 310 million including earnouts for the CTC acquisition.

The acquisition will enable Tech Mahindra to tap onto the potential industry disruption in the Insurance sector, expand its offerings to high-end digital engineering services for some of the largest insurance, re-insurance and financial services organizations globally and scale its nearshore delivery presence.

The company is also investing a cumulative amount of € 20 million, in SWFT and Surance, for a 25% ownership in each of these two InsurTech ventures funded by the same founding group as CTC.

“The Insurance industry is currently undergoing a significant transformation which is driven by new emerging business models, that are powered by disruptive digital technologies,” said Vivek Agarwal, President – BFSI, HLS, and Corporate Development, Tech Mahindra.

“In order to enable this digital transformation, we are investing in strengthening our capabilities to support insurers in accelerating their transition to cloud-based platforms and provide end-to-end engineering with a strong European nearshore presence,” he added.

Here is what brokerages have to say about the stock and the company:

Jefferies

Foreign broking house Jefferies has maintained buy call on the stock with a target at Rs 2,030 per share as the CTC acquisition should help the company to create a stronger insurance practice and will boost its product engineering capabilities.

The acquisition would add USD 90 million to its revenues & should be EPS accretive and company remains our preferred pick, said broking house.

Nomura

The research house has kept buy rating on the stock and raised the target price to Rs 2,220.

The CTC acquisition & stakes in SWFT & Surance are going to bolster digital engineering capabilities.

The acquisitions is going to bolster insurance portfolio significantly, as the valuation of acquisition is attractive.

Sharekhan

This acquisition would drive the company’s growth going ahead given cross-sell opportunities, enhancement of capabilities in digital engineering space, creating integrated offerings for insurers and increasing the chance of winning large transformational deals.

As CTC has industry-leading margin, the acquisition will be margin accretive to TechM on a consolidated basis.

We continue to prefer TechM, given improving execution rate, industry-leading growth in the BPS business, healthy deal TCVs, scope for margin improvement, good capital allocation, and 5G opportunities. We maintain our buy rating on the stock with a revised price target of Rs 2,060.

Motilal Oswal

Tech Mahindra’s higher exposure to the Communications vertical remains a potential opportunity as a broader 5G rollout can lead to a new spending cycle in this space. The company is seeing traction in 5G investments.

We expect a gradual improvement in EBIT margin, given the levers around productivity and cost optimization. Elevated operating metrics and supply side pressure remains a risk to our margin estimates.

We expect company to deliver mid-teens growth in FY22. We value the stock at 22x FY23E EPS. We remain neutral on the stock.

Prabhudas Lilladher

Our EPS estimates increase by 1.6% for FY23& FY24 led by revenue increase in revenue growth estimates for FY23 & FY24. We arrive at DCF based target price of Rs 1945, earlier Rs 1908 (implying target multiple of 23x on FY24 EPS).

TechM is currently trading at 22.2/20.4x earnings multiple on FY23/24 EPS of Rs 77/84.4 on FY23/24E respectively, inexpensive. TechM has Revenue/EPS CAGR of 13.8%/13.5% over FY22-24. Maintain Buy.

At 09:16 hrs Tech Mahindra was quoting at Rs 1,745.40, up Rs 23.75, or 1.38 percent on the BSE.

The share touched a 52-week high of Rs 1,837.75 and a 52-week low of Rs 915.05 on 30 December, 2021 and 26 February, 2021, respectively.

Currently, it is trading 5.03 percent below its 52-week high and 90.74 percent above its 52-week low.

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