Inorganic growth has been the buzzword for India’s information technology (IT) sector, with large companies announcing an acquisition or two over the past 12 months. The Street is now turning cautious, as it needn’t always be margin-accretive. An example is Tech Mahindra’s weaker than estimated performance in FY15, thanks to a sharp fall in profitability at Lightbridge Communications Corp (LCC). Tech Mahindra acquired Lightbridge for $240 million in 2014.
After reporting superior revenue growth rates through FY13-14, Tech Mahindra’s organic growth has come off sharply in FY15. Its revenue growth in constant currency declined 1.2 per cent sequentially and margins contracted 530 basis points (bps), worse than peers. The margin shocker came from LCC. Operating margin of LCC fell to 2.5 per cent in the quarter gone by, against the reported 8-10 per cent at the time of acquisition, on high integration costs and seasonal weakness.
Not all analysts, though, are optimistic.
On the back of overall disappointing performance in the fourth quarter of FY15 and a not so encouraging near-term outlook, IIFL has cut earnings estimates by 15 per cent and 20 per cent for FY16 and FY17, respectively. The cut has been driven by much lower operating margin assumptions. Several analysts have cut the stock’s target price to Rs 640, valuing the stock at 15 times the FY17 earnings.