Tech Mahindra comes a step closer to 2015 goal

After the acquisition of US-based LCC, it needs one more big-ticket acquisition to become a $5-billion company

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The acquisition of US-based global telecom network services provider Lightbridge Communications Corporation, or LCC, has taken Tech Mahindra a step closer to its target of becoming a $5-billion company by the end of 2015-16.

Two years ago, Tech Mahindra had set itself the goal of reaching $5 billion in revenue by 2015. Its strategy has been to grow through acquisitions. Since 2012, it has bought six companies to expand its presence in various verticals, including telecom and banking. While Tech Mahindra might miss the original deadline, it could still reach the target by the third quarter of financial year 2015-16, provided it makes one more big-ticket acquisition, say analysts tracking the company.

A look at the numbers tells the story. The information technology services provider's management in a recent analyst call had stated that the company is targeting a revenue run rate of $1,250 million per quarter. At present, the quarterly run rate has been $850-900 million. To this, $100-110 million a quarter will be added by LCC, which is expected to generate revenues of $430 million for the calendar year 2014.

In terms of organic growth, Tech Mahindra has a quarterly run rate of 3-4 per cent quarter-on-quarter. For the quarter ended September 30, 2014, the company reported revenue growth (in US dollars) of over 5 per cent. "Ideally, ,another acquisition of a similar size and maintaining the current run rate on growth will allow Tech Mahindra to reach its target of $5 billion," says an analyst.

With cash reserves of around Rs 3,600 crore, funds won't be a constraint for Tech Mahindra in making another acquisition. Analysts also believe that a delay of a month or two in achieving this target won't be a negative for the company.

In an earlier interview to Business Standard, Tech Mahindra Chief Executive C P Gurnani had said that 8 to 10 per cent of the $5 billion turnover will come through acquisitions. Since 2012, after the acquisition of Satyam, Tech Mahindra has acquired six companies, each of them giving the company access to new customers, geography or technology.

Shoring up non-telecom
Analysts, however, point out that though the company has been growing at a good pace, it now needs to concentrate on its non-telecom business. "Much of the growth for Tech Mahindra is coming from the telecom business. If you leave out Complex IT, then all its acquisitions have been in the telecom segment. The non-telecom business now needs to grow at a faster pace," says an analyst from a leading foreign brokerage firm.

The company has said that revenue from the enterprise segment will see good growth from the second half of 2015-16. Analysts have said that the company's enterprise business other than manufacturing and technology has been rather soft. Tech Mahindra's telecom business has registered industry-leading growth both organically and inorganically, but verticals such as technology media & entertainment, banking finance and insurance services (BFSI) and retail, transport and logistics have remained slow (see Share in the revenue pie).

"The slow enterprise growth is also because of legacy issues with Satyam. But over the past year, Tech Mahindra has gone aggressively to the market and has managed to close deals too. We expect growth to improve towards the end of this fiscal year," says Nitin Padmababhan, IT analyst at Espirito Santo Securities.

Padmanabhan says the LCC acquisition makes sense as it has allowed the company to diversify into the network service segment of the telecom business. "It has managed to close some large deals in the telecom business but telecom tends to be a lumpy business. Besides, telecom has historically suffered a lot and the company needed to broadbase it. The management has been looking at the BFSI space for an acquisition for sometime now, and this should add to growth in the enterprise segment," he says.

For the quarter ended September 30, 2014, the company reported closure of three large deals. "At any point in time, we work on 8 to 10 large deals as a firm. I have often been asked as to when those deals are going to see the light of the day, and I have always said that they take a longer sales cycle. I think we have hit that sweet spot this quarter of seeing three of them fall in during the course of the quarter," said Manoj Chugh, global head (enterprise), Tech Mahindra, during the analyst call after the second quarter results.