Acquired biz segment seeing steep growth – Tech MahindraAssetmultiplier
Update on the Indian Equity Market:
On Tuesday, Nifty ended in the green amid weak global cues. It ended at 17,176 (+1.6%) after making a high of 17,251. METAL (+3.1%), PRIVATE BANK (+2.5%), and BANK (+2.5%) were the top sectoral gainers and there were no sectoral losers. Among the NIFTY50 stocks, HINDALCO (+5.1%), TATASTEEL (+4.0%), and AXISBANK (+3.6%) were the top gainers while BRITANNIA (-0.6%), CIPLA (-0.6%), and DIVISLAB (-0.4%) were the top losers.
Edited excerpts of an interview with Mr. Vivek Agarwal, President-BFSI and Corporate Development at Tech Mahindra (TECHM) with CNBCTV18 on 6th December 2021:
- The last couple of years have opened a new segment of WFH, this acquisition helps TECHM service their customers with a new channel and takes. It takes away a lot of dependency on physical infrastructure and helps provide services from anywhere.
- The entire WFH segment has been witnessing explosive growth over the last couple of years. From a long-term perspective, 55% of customer experience workers are expected to work from home or from anywhere by 2024. This represents huge a addressable market space for TECHM.
- From a synergies viewpoint, the company will be taking these capabilities to their existing customers and Activus Connect has its customer base as well which represents a significant cross-sell opportunity for TECHM.
- TECHM expects this explosive growth to continue over the next 3-4 years.
- The acquired company has industry-standard margins and on the growth front, the business’ organic growth is been exceptional. From a long-term perspective of its core business, TECHM expects to generate 30-40% additional revenues through synergies and take these capabilities to the existing customers.
- The acquired company has a unique technology platform that lets one apply all the good practices around data, security, and performance management for remote workers.
- TECHM expects the business to have industry-leading growth on its own and is excited about the synergies that will be created out of this acquisition in the knowledge segment space.
- The margins of this company are expected to be at par with what TECHM does which is their objective in every acquisition they do.
- While certain capabilities are specific to particular sectors, the offering per se is sector agnostic.
- Return to the office for TECHM employees is largely voluntary. Some of them are returning in hybrid mode and this work model is expected to continue. However, 15-20% of their workforce has started coming to the office which mainly comprises of the top management of the company.
Asset Multiplier Comments
- TECHM has grown organically & inorganically (dollar revenue CAGR FY17-21 of 4%). The company will continue to acquire for scale, synergies, cross-sell benefits, and upselling.
- We expect healthy deal wins, traction in the communication segment led by legacy modernization, 5G, customer care, automation, network, and cloud to drive revenues.
- Higher offshoring, synergies in portfolio companies, automation, & operating leverage is expected to help margin expansion.
Consensus Estimate (Source: market screener and Tikr websites)
- The closing price of TECHM was ₹ 1,575/- as of 07-December-21. It traded at 25x/22x/19x the consensus EPS estimate of ₹ 64/73/81 for FY22E/ FY23E/FY24E respectively.
- The consensus target price of ₹ 1,783/- implies a PE multiple of 22x on FY24E EPS of ₹ 81/-.
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