BT initially held a 42.4% stake in TechM, but it had been consistently reducing its stake and finally it exited from the JV by selling its remaining stake of 9% for Rs 1,000 crore in December '12. However, BT continues to be its top client contributing around 30% of its revenues.
The company's services include Business and Operations Support Systems (BSS/OSS), System Integration (SI), Engineering, Mobility and Remote Infrastructure services, among others. Back in 2009, TechM expanded its IT portfolio by acquiring Satyam Computers for Rs 2,889 crore and the company is in the merger process. TechM has over 50,000 employees. Post merger with Mahindra Satyam (MSAT), TechM would be the fifth largest IT company in India.
Investment Rationale
Tech Mahindra: Mahindra Satyam Merger - A De-risking Model
TechM acquired 51% in Mahindra Satyam (MSAT) in 2009 for Rs 2,889 crore. The combined revenues of TechM and MSAT would be over USD 2.5 billion and would enable the company to chase larger deals and improve traction for the merged entity.
Primarily for TechM, the merger would dilute its concentration towards the telecom industry, de-risk the top client contribution (BT's contribution to total revenues in the combined entity would come down significantly to 17% to 18% from current 29%) and have a well-balanced geographic distribution.
For MSAT, this move will help address its concerns like client and employee retention, legal disputes, profitability and the management can focus fully on its growth drivers.
Moreover, Satyam has considerable exposure to different verticals like BFSI, manufacturing, retail but not telecom, while close to 96% of Tech Mahindra's revenues come from telecom. So, the strengths (verticals and services) of both these companies will complement each other.
Post merger, the combined entity is said to become India's fifth largest IT company. However, on P/E basis, TechM is trading at lower valuations as compared to its peers. We believe TechM would command better valuations once the synergies of MSAT merger starts reflecting on the company's financials.
Risks
Delay In Merger:
The positives flowing in to the company from the combined entity will be further delayed if the merger does not take place as soon as anticipated.
Currency Fluctuations:
Any drastic variation on the currency front would adversely affect the company's revenues, margins as well as profitability.
Conclusion
TechM's merger synergies with MSAT are not limited to just de-risking the revenue profile. It will drive better revenue growth through cross selling of services; higher scale (USD 2.7 billion combined revenue in FY13) will allow the company to bid for larger deals. Additionally, strong deal wins, right acquisitions and reduced concentration on BT will help the combined entity to offer the much needed momentum to revenue growth. The stock is trading at a PE of 11x its FY13E earnings of Rs 99.4. Investors can look at buying the stock with a long-term perspective.
Source: Nirmal Bang's Beyond Market
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