Tech Mahindra to Buy Firms to Curb Telecom Bias

Tech Mahindra (TECHM) Ltd., the Indian software-services company that bought Satyam Computer Services Ltd., is considering acquisitions to curb its dependence on telecommunications clients.

The company, whose clients include Vodafone Group Plc and BlackBerry Ltd., wants to boost revenue from industries such as health-care and retail, Chief Marketing Officer Hari Thalapalli said in an interview in Hyderabad.

About 47 percent of Pune-based Tech Mahindra’s sales come from the telecom sector, Thalapalli said. Software spending by telecommunication companies is likely to grow 1.3 percent this year, compared with 4.6 percent in other industries, according to researcher Gartner Inc.

“As we focus more on other verticals, we will have to have people who understand specific businesses like health-care and retail,” said Thalapalli, 49. Any acquisitions would be “niche, not very large,” he said, declining to specify how much Tech Mahindra may spend or name any targets.

The reliance on telecommunications revenue “is a weakness, and they need M&A to gain more revenue from other segments,” said Pratish Krishnan an analyst at Antique Stock Broking in Mumbai with a “buy” rating on Tech Mahindra. “I expect the management to do something in the next six to nine months.”

Tech Mahindra, based in Pune, has acquired nine companies since 2005, according to the company’s website. The company bought control of Satyam in 2009 and then merged with it in the middle of last year in an 89.9 billion-rupee ($1.5 billion) transaction. The merger made Tech Mahindra the fifth-largest Indian software exporter by revenue.

Satyam

India auctioned Satyam in April 2009 after dismissing the board led by founder Chairman Ramalinga Raju who admitted to inflating the company’s assets and understating debt by about $1.8 billion.

Sales for the year that ended March 31, the first full year after the merger, are estimated to have been 187.6 billion rupees, more than double the 12 months before, according to data compiled by Bloomberg. The company is scheduled to release results on May 15.

“If you leave out Satyam, the growth hasn’t been as much as some of its peers,” said Abhishek Shindadkar, an analyst at Icicidirect.com in Mumbai with a “hold” rating on the stock. “The reason for the slow growth is obviously the telecom focus.”

Tech Mahindra will need acquisitions to broaden revenue and meet its sales target of $5 billion by 2015, said Dhananjay Mishra, an analyst at Sushil Finance Consultants Ltd. in Mumbai, who rates the stock “accumulate”.

Shares

“Once a company achieves a certain size, it can only sustain growth inorganically,” he said.

Tech Mahindra has declined 3.3 percent this year, compared with the 5.5 percent decline in the S&P BSE Infotech Index. The stock gained 1.8 percent in Mumbai on Friday, May 9, valuing the company at 414.8 billion rupees ($6.9 billion).

The shares trade at 12.5 times estimated earnings, compared with a five-year average of 11.8.

Mahindra & Mahindra Ltd. (MM), India’s largest sports utility vehicle maker, owns 26 percent of Tech Mahindra, according to data compiled by Bloomberg.

“An acquisition is like a marriage,” Thalapalli said. “You have to find the right person, and you have to make sure that you live happily ever after. You can’t afford to jump in at the first opportunity that comes your way.”

To contact the reporter on this story: Sharang Limaye in Hyderabad at slimaye@bloomberg.net

To contact the editors responsible for this story: Arijit Ghosh at aghosh@bloomberg.net Dick Schumacher

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