Tuesday, January 18, 2022

Tech Mahindra Ltd: CTC Acquisition To Strengthen TechM’s Insurance And Digital Engineering Capabilities


CMP: Rs1722  

Target Price: Rs1930

* TechM has agreed to acquire a 100% stake in Com Tec Co IT Ltd (CTC), an IT solutions and services provider serving the insurance and financial services industries, for a cash consideration of EUR310mn, including earnouts (~4x EV/Sales on annualized CY21E sales). It is also acquiring a 25% stake in SWFT Technologies Ltd and Surance Ltd for EUR16.5mn and EUR3.5mn, respectively, with an option to acquire another 20% stake in the next two years.

* Deal rationale: The CTC deal will strengthen TechM's digital capabilities with the addition of over 720 skilled professionals across digital engineering, UI/UX, architecture, agile full stack capability, cloud, AI/ML, etc. It will also expand the talent pool access across eastern European markets. The acquisition will strengthen TechM's digital transformation expertise and expand its offerings to high-end digital engineering services for some of the largest insurance, re-insurance and financial services organizations globally. It will scale up TechM's near-shore delivery presence in Europe. The business will be co-branded as Tech Mahindra CTC with immediate effect. The company will put in place an integrated operational management team that will focus on driving identified areas of synergies, including but not limited to cross-sell and scale up digital engineering capabilities.

* Deal structure: TechM will pay a total consideration of up to EUR310mn, including earnouts for the acquisition of CTC, which includes an upfront payment of EUR210mn and EUR100mn of earnouts over four years based on business performance and realized synergies benefits. It will also invest a cumulative amount of EUR20mn in SWFT (EUR16.5mn) and Surance (EUR3.5mn) for a 25% ownership in each of these InsureTech ventures funded by the same founding group as CTC.

* Brief profile of CTC: Incorporated in 2011, CTC is a specialized digital engineering and outsourced product development organization with development centers in Latvia and Belarus with 720+ employees (85% in Lativa and 15% in Belarus having capabilities in Agile Full stack, Architecture, UI/ UX, Cloud, AI/ML). CTC provides digital platforms and applications, and digital transformation-based services, including product engineering, cloud engineering, UX/UI design, AI/ML, cybersecurity services. It offers high-end digital engineering services to some of the largest insurance and reinsurance organizations globally. CTC posted revenue of EUR36.6mn/EUR57.6mn/EUR71.3mn/EUR58.8mn in CY18/CY19/CY20/9MCY21.

* Our view: This is the 10th acquisition announced by TechM in FY22 YTD and underlines its focus on strengthening its digital business under the NXT.NOW framework. The CTC acquisition and investments into Insuretech platforms will strengthen TechM's Insurance capabilities and expand its client portfolio across insurance, reinsurance and financial services firms. The acquisition will strengthen TechM's digital engineering capabilities and scale up its European presence with the addition of over 700 skilled IT professionals. Management during the call indicated that CTC operates at industry-leading margins and that the deal will be accretive to TechM's EBIT margins on a full consolidated basis. As per management, the transaction will be EPS (even on GAAP basis) and ROCE accretive. Given the size of the acquisition (<2% of Tech Mahindra's revenue), we do not expect any meaningful revision to our earnings estimates. We have a Buy rating on the stock with a TP of Rs1,930 at 25x Dec'23E EPS.

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