Tech Mahindra (TM) and parent M&M (60:40 ratio) have announced the acquisition of Pininfarina, a listed Italian auto design and engineering services firm, at an EV of 81 million euros. This acquisition would provide engineering design capabilities and access to a few European automakers. We would have liked if TM had put its cash to acquire capabilities in the digital or financial services domain, instead. This acquisition, although small, combined with the recent foray into payments bank is not an optimum utilization of cash in our view. PINF provides engineering design services (93% of revenues) and some spares to automakers such as BMW, Ferrari, Peugot, Fiat, GM, Alfa Romeo and Maserati. It has been loss-making for past few years (loss at the EBITDA level in 9MCY15) and has undergone debt restructurings. We would have preferred TM acquiring digital capabilities or a firm in the financial services vertical. Recent foray into payments bank and now this acquisition is not the best use of cash, in our view. TM needs to be prudent on cash management or else risk losing investor confidence in capital allocation decisions. Delays in deal closures would work against TM in the short term; else we like TM leadership in telecom and solid positioning in manufacturing. Valuations are inexpensive and riskreward is attractive.
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