Tech Mahindra on slippery ground post CTC acquisition

Shares of Tech Mahindra slipped 2 per cent to Rs 1,686.35 on the BSE in Tuesday’s intra-day trade after the company announced acquisition of 100 per cent stake in Europe-based Com Tec Co IT (CTC) and 25 per cent stake in two insurtech platforms for a total of EUR 330 million (about Rs 2,800 crore).

Tech Mahindra informed the stock exchanges on Monday after market hours that it has approved the proposal to acquire 100 per cent stake in CTC for €310 million (3.8x price to CY21 sales), out of which €210 million will be paid upfront and rest €100 million will be paid over the next four years linked to synergy achievements.

CTC specialises in developments of product in insurance and reinsurance industry. CTC revenue grew around 40 per cent CAGR over CY18-20 and it has industry leading EBIT margins and the transaction will be EPS accretive as per management.

Tech Mahindra is also acquiring 25 per cent stake in two platforms owned by CTC namely SWIFT and SURANCE for €20 million, with an option to acquire further 20 per cent stake in the platforms over the next two years.

SWIFT is SaaS-based digital customer engagement platform. It offers multiple functionalities for insurance sales & distribution while SURANCE is an end-to-end personal cyber insurance solution that focuses on vulnerability assessment, cyber protection, and cyber insurance coverage.

Tech Mahindra said the acquisitions will strengthen its digital engineering and insurance technology businesses. “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 said in exchange filing.

Meanwhile, Tech Mahindra has been underperforming the market ahead of its December quarter (Q3FY22), and the stock had declined 3 per cent in past one week, as compared to 0.83 per cent rise in the S&P BSE Sensex. In the last one month, the stock was up 3 per cent, as against a 7 per cent rally in the benchmark index. The company is yet to announce its Q3FY22 results date. In the past six months, the stock has surged 53 per cent, when compared to a 15 per cent rise in the Sensex.

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,” Motilal Oswal Financial Services said in stock update. The brokerage firm maintain “Neutral” rating on the stock with a target price of Rs 1,910/share. Business Standard