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The market gave a thumbs down to the stock of Tech Mahindra last week after it announced acquisition of 76 per cent stake in Italian engineering company Pininfarina, a well-known Italian engineering company that has designed cars for Ferrari and Rolls Royce.
Tech Mahindra will hold 60 per cent in the special purpose vehicle that will invest in Pininfarina with the balance investment coming from Mahindra & Mahindra (M&M). The total cost of the deal worked out to €53 million. The Italian company Pininfarina could complement Tech Mahindra’s engineering capabilities and help the latter expand into Italy and Germany. Currently, the manufacturing sector accounts for a third of Tech Mahindra’s revenues. Of the 100-plus customers for Tech Mahindra in the manufacturing space, 25 are automotive majors.
The deal structure seems to have irked the market. But Tech Mahindra said that it entered into a JV with M&M for its auto expertise. Worries about the immediate impact on Tech Mahindra’s margins also hit the stock.
Pininfarina makes losses at the net level due to high burden of interest cost. But there may not be a significant impact on Tech Mahindra’s earnings due to the small acquisition size.
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