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Prabhudas Lilladher
Tech Mahindra (Buy)
CMP: ₹2,754.55
Target: ₹3,050
Tech Mahindra (TechM) has signed a definitive agreement to acquire SOFGEN Holdings (SOFGEN). The transaction is expected to close by March 2015, subject to regulatory approvals. SOFGEN is a niche consultancy group with specialisation in private, commercial and retail banking. Founded in 1999, SOFGEN has 20 offices in four continents with strong presence in Asia Pacific, Latin America and Africa. The portfolio of service offerings are multi-jurisdictional tax reporting, liquidity risk analysis, microfinance and additional core banking platforms.
TechM will acquire SOFGEN for sub-$30 million (1/3rd as earnouts paid over next two years depending on revenue and margin growth) in an all-cash deal. It will add revenue of $45 million with EBITDA margin of 8-9 per cent to TechM’s P&L.
SOFGEN has got strong Temenos (about 60 per cent revenue) exposure with little maintenance contract. We see risk around implementation projects that could be non-recurring in nature.
TechM derives around 10 per cent of revenue from BFSI. The company has witnessed increased traction in BFSI over the last four quarters growing at CQGR of 7.1 per cent compared with overall revenue CQGR of 4.4 per cent over the same period. We see the current investment to further strengthen their presence in BFSI.
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