Tech Mahindra-Perigord deal seems logical, but execution is key
This acquisition seems logical as it will help Tech Mahindra expand its capabilities in the global pharmaceutical, healthcare, and life science segment, according to analysts.
Tech Mahindra Ltd has acquired a 70% stake in Ireland-based Perigord Asset Holdings Ltd. The deal will happen for a cash consideration of €21 million. Perigord is a specialist in end-to-end packaging supply chain solutions to the life sciences industry.
This acquisition seems logical as it will help Tech Mahindra expand its capabilities in the global pharmaceutical, healthcare, and life science segment, according to analysts.
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This vertical contributes to around 9% to Tech Mahindra’s revenue. However, to get the desired result, execution holds the ultimate key.
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“The Perigord acquisition adds a new set of capabilities to Tech Mahindra’s back office BPO offerings. Realization of synergies, especially cross-selling of offerings, is critical for the acquisitions to serve the intended purpose of accelerating growth. Cross-selling of offerings is important to gain scale in accounts and an important area of focus," analysts at Kotak Institutional Equities said in a report on 16 March.
In the third quarter of FY21, Tech Mahindra saw a constant currency revenue growth of 2.8% sequentially, which was aided by strong demand in its BPO business.
Investors should note that Tech Mahindra has recently been on an acquisition spree. In January, the company said that it will acquire 100% stake in fintech firm Payments Technology Services for $9 million.
In 2020, the company acquired full or part stakes in six companies. Tech Mahindra has a long-term growth plan of expanding its presence across the key markets of the US, India, Ireland, and Germany.
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The company’s annual spend on acquisitions will be in the 30-40% free cash flow range, a high number but not a surprise, noted the Kotak report.
This transaction with Perigord is expected to close by 19 March 2021. Tech Mahindra will acquire the remaining 30% stake in the next four years at valuation linked to the financial performance of Perigord, the company said.
This acquisition is in line with its expansion strategy, but it does not move the needle on earnings. “Given the size of the acquisition (<0.5% of Tech Mahindra’s revenue), we do not expect any meaningful revision to our earnings estimates," domestic brokerage house Emkay Global Financial Services Ltd said in a report on 16 March.
Little wonder then that up move seen in the stock post this announcement on Monday did not last.
Shares of the company ended Tuesday’s session on a flat note at ₹1,026.55 on the National Stock Exchange.
Since 1 January 2020, the Tech Mahindra stock has rallied by 35%, significantly underperforming sector index Nifty IT, which has given 68% returns in the same time span.
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