Tech Mahindra bolsters its Rail Engineering Services capabilities via IIS acquisition

PUNE: Tech Mahindra announced that it would acquire Inter-Informatics spol. s.r.o. (IIS) through its wholly owned subsidiary Mahindra Engineering Services (Europe) Limited for an enterprise value of €5.4mn or ~$6.2mn (cash). The deal is expected to be closed by mid-September giving it a little over six months of revenue contribution from the acquisition for FY19.

The portfolio of IIS Rail engineering services ranges from the concept, 3D design, analysis, 2D, production and service documentation; and machinery support in the areas of Interiors, Car Bodies, Equipment, Bogies, Tools & Jigs, Stress Analysis etc of its Rail business unit.

IIS, headquartered in Czech Republic, is a leading provider of aerospace design engineering services predominantly present in Czech Republic with a minor presence in Romania. The three primary lines of business for IIS are aerospace, machinery and rail.

The acquisition was made at a multiple of 0.6x EV/Sales based on CY17 sales. Although attractive, the low valuation could be on account of flattish sales at best for IIS over the past two years. However, this will improve Tech Mahindra’s capabilities in the aerospace vertical and particularly, the cabin engineering space.

Tech Mahindra’s revenue growth over the past two years has been driven by the enterprise services business, while its telecom contribution has declined from ~52% in FY16 to ~43% in FY18 and ~40% as of Q1FY19. The enterprise services business growth is largely on account of BFSI/manufacturing/healthcare with a considerable portion of the growth coming from engineering services. The telecom services business is set to recover as the company has already won deals worth ~$200mn in the QTD Q2FY19 against a total order (inclusive of enterprise service) run-rate of $270-300mn over the past few quarters.

At ~13.7x FY20E EPS, the stock is trading at an attractive valuation as it is at a significant discount to Infosys (19%) and Wipro (7%). Tech Mahindra Ltd is currently trading at Rs711.35 up by Rs3.1 or 0.44% from its previous closing of Rs708.25 on the BSE.

The scrip opened at Rs711.95 and has touched a high and low of Rs714 and Rs709.30 respectively. So far 4,93,480 (NSE+BSE) shares were traded on the counter. The current market cap of the company is Rs.69,451.54cr.