>Tech Mahindra acquires 51% stake in Comviva (JM Financial)

Comviva to strengthen mobile VAS offerings

Tech Mahindra acquires 51% stake in Comviva: Tech Mahindra has announced the acquisition of 51% stake in Comviva Technologies for a total consideration of `2,600mn. This includes upfront payment of `1,250mn and deferred payment of `1,350mn over a period of 5 years based on performance targets. Comviva had FY12 revenues of US$70mn with mid-teen
EBITDA margins. The transaction values Comviva at 1.3x FY12 EV/Sales and 8.6x FY12 EV/EBITDA assuming 15% EBITDA margins. Management expects the deal to be EPS accretive for Tech Mahindra. As per our calculation, the transaction adds c.1.5-2% to FY14 EPS.

Strategic intent of the acquisition: Comviva provides solutions in mobile data, integrated messaging, mobile payments etc. Acquisition of Comviva is in-line with TechM’s strategy of (a) investing in emerging areas such as Network, Mobility, Analytics, Cloud and Security, and (b) focusing on nonlinear growth. TechM already has presence in mobility solutions through its
subsidiary CanvasM, which contributes c.2% to total revenues currently. Comviva acquisition should further strengthen TechM’s VAS offerings particularly in the field of VAS infrastructure management and Mobile payment and platforms. The acquisition will also enable TechM to cross-sell Comviva’s offerings to its telecom clients.

Other details: The acquisition will add c.1,500 employees to TechM. Airtel is the largest client of Comviva and top-10 clients contribute c.85% to total revenues. Comviva derives c.30% revenues from VAS managed services and c.70% from platform-based solutions. Post deal closure, TechM will own 51% stake in the company, Bharti group 20%, PE firms 9% and employees the balance. Comviva had cash and cash equivalents of c.`320mn at end-Jun’12.
 
Maintain BUY rating with target price of `1,260 based on 12x 1 year forward P/E.

RISH TRADER