Tech Mahindra acquires Hutchison Global Services

CMP Rs821, Target Rs910, Upside 10.8% 

• Tech M has announced the acquisition of 100% equity stake in Hutchison Global Services (HGS) - an end-to-end customer services captive unit for an upfront payment of US$87.1mn. HGS is one of the largest captives in telecom domain, having 11500 strong employee base.
  
• The deal comes with a guaranteed revenue commitment of US$845mn over five years (US$169mn per annum-~15% of FY12 revenues). This values HGS at 0.5x Price/Sales, relatively cheaper as compared to past deals which were in the range of 0.8x to1.9x Price/Sales. Additionally, HGS is debt-free with cash of US$20mn.
  
• HGS’ services include lower end voice/email/chat based support services (non-voice based business is negligible) with revenues coming from UK (60%), Australia (30%) and Ireland (10%). The acquisition is effective immediately and would start accruing to Tech M revenues from Q2 FY13.
  
• Operating profitability of the acquired entity is alluded to be in-line with Tech M BPO business operating margin and the company has been profitable over the last few years.
  
• Rationale- The key benefit from the deal apart from the sizeable revenue commitment include the opportunity to deepen the relationship with Hutchison’s other global businesses. Also, the people and process expertise can be cross-leveraged to provide similar services to other telecom clients.
  
• Relatively cheaper acquisition (as compared to similar deals in the past), sizeable revenue commitment, EPS accretive deal and opportunity to leverage services for other clients are the key reasons why we like the acquisition. We increase our earnings estimates by 3.6%/6.4% respectively for FY13/FY14E to incorporate the same. Increase 9-month TP to Rs910 and maintain BUY.