Why Tech Mahindra is buying growth engines for the future

Technology-services firm Tech Mahindra announced three acquisitions in October: Beris Consulting in Germany, We Make Websites in London, and Lodestone in the US. These took its M&A tally in the past 10 months to eight buyouts!

While the company is filling capability gaps for emerging technologies through buyouts, its revenue in the past five fiscal years (FY) has crawled at a compounded growth rate of 3.3 percent.

On a year-on-year basis, Tech Mahindra's revenue in FY 2021 declined by 1 percent. It finished that fiscal with revenue of $5.1 billion, even as the IT industry is on a roll, marked by increasing number of deals.

In the quarter ended September 2021, Tech Mahindra told equity analysts that its net new-deal wins were at $750 million. However, its operating profits have grown faster than revenue over the past five fiscal years — at a compounded rate of 8.2 percent.

Tech Mahindra's management insists it has three pillars of growth: increasing demand for compute power, high adoption of cloud and AI, and surge in requirements for 5G network connectivity.

“Our three pillars of growth, which lead to digital transformation and cut across various verticals, are firing,” CP Gurnani, CEO and Managing Director of Tech Mahindra, told news reporters on October 25.

5G will be a dominant part of wins and engagements for Tech Mahindra, according to a research analyst in stock brokerage Edelweiss Securities.

"It is one of the transformation stories, and continue to be least capital-intensive," said the Edelweiss Securities report dated October 25, 2021. Communications, media and entertainment, account for 40 percent of Tech Mahindra's revenue.

Still, Tech Mahindra does have a task at hand for the long term.

"Although the strong deals wins should provide momentum in the near term, the lack of visibility for medium- to long-term growth keeps us unexcited about (the) Tech M story," said brokerage PhillipCapital (India)'s independent equity research group on October 25, 2021.

The eight companies Tech Mahindra has acquired add less than $200 million to its revenue. So, its M&A strategy points to a concerted effort to have more growth engines that will fire in the long term, as larger peers are pegged to grow in double digits at the end of FY 2022.

“These acquisitions are for building specific capabilities, which are high growth in nature,” Vivek Agarwal, Head of Corporate Development, Tech Mahindra, told reporters on October 25. “We will look at spending a lot of money, and investing in new age products.”

"The acquisitions are across industries, North America, Asia and Europe, and a lot of them are driven by digital transformation initiatives at these firms," Agarwal told EnterpriseStory.

The $105-million acquisition of Lodestone in the second quarter of FY 2021 strengthens Tech Mahindra’s digital-engineering capabilities, and allows it to provide “end-to-end product quality assurance across hardware, software, and data layers,” according to a press statement from Tech Mahindra.

"It gives Tech Mahindra a competitive position as a digital-transformation enabler in engineering," Agarwal says. He also heads the company's BFSI (banking, financial services, insurance) and HLS (healthcare and life sciences) industry verticals.

Tech Mahindra also bought We Make Websites (WMW), a platform that helps in migration services on the Shopify Plus platform.

WMW has 48 employees, and reported revenue of £4.6 million ($5.3 million) in 2020. This will expand Tech Mahindra's scope in the retail industry, which contributes less than 8 percent to revenue.

In early October, Tech Mahindra acquired Beris Consulting for €7 million ($8.1 million).

With Beris, Tech Mahindra can “unlock the transformational growth in the IT and application space for the automotive industry as a result of electric vehicle, sharing, and mobility,” Tech Mahindra had said in an exchange filing on October 1.

Beris also helps the company to expand in Germany with better presence, local expertise, and client relationships. Manufacturing contributes 16 percent to Tech Mahindra's revenue, and the Beris buyout helps it be relevant to deals in the segment.

Tech Mahindra acquired three companies in the US in the first quarter of fiscal year 2022 — DigitalOnUs, Eventus, and Brainscale — for a total spend of less than $200 million.

These add to Tech Mahindra’s cloud and consulting services business and, more importantly, give the company deeper presence in North America, which contributes 47 percent to its revenue.

Between January and March this year, the company also bought Perigord Asset Holdings €21 million ($24.4 million) in Ireland, and Payments Technology Services in Hong Kong for $9 million from Fidelity Information Services.

Perigord is a digital workflow and BPO services firm, which specialises in end-to-end packaging supply chain solutions to the life sciences industry. Tech Mahindra doesn't have significant revenue from healthcare and life sciences.

On the other hand, Payments Technology Services helps Tech Mahindra offer products and platforms for the BFSI segment, which contributed to 16.2 percent of revenue in FY 2021.

The company's next step will be to integrate these companies, and drive synergies. “We have to be able to take those capabilities and differentiated offerings to our 1,100+ customer base," Agarwal said. "That's really where it creates value for us.”

"The whole digital transformation and demand-related scenario is a multi-year cycle," Agarwal reiterates. The growth engines in non-telecom industries could ensure higher margins for Tech Mahindra, but it's not taking its eye off the core opportunity in telecom.

"Telcos see a capex (capital expenditure) cycle every six or eight years linked to evolving technology," he notes. "And right now, we are seeing that big capex cycle in the industry driven by 5G adoption."

Telecom operators seek to upgrade their networks and systems to adopt new technologies, and create new service offerings for their clients. "Almost half of our new large deal wins have an element of 5G," Agarwal says.

The larger opportunities are in digitisation and customer experience, which is where the acquisitions will prove to be vital. "In telcos and CME (communications, media and entertainment) sector, those are the broader themes. Media and entertainment is becoming more centre-stage in our go-to-market and business," Agarwal adds.