Dealmaker Vineet Nayyar's M&A strategy transformed Tech Mahindra
When Vineet Nayyar joined Tech Mahindra (called Mahindra British Telecom), it was a mere $110-million company. Today, it has revenues close to $3.9 billion, and is the second biggest company in the Mahindra Group with a share of 23 per cent of group revenues. It is also No. 6 in the Indian IT services pecking order - after TCS, Cognizant, Infosys, Wipro, and HCL Technologies. Most of the growth has come in the past three years, as the company followed an aggressive acquisition-led strategy. Sitting in his plush yet elegant home in Delhi's tony Friends Colony, and surrounded by several paintings of M.F. Husain, Nayyar, Vice Chairman of Tech Mahindra, says: "There are two aspects (to acquisitions). One is finding the right asset. But, far more important is to make it work. And that is where we differentiate."
In the past three years, Tech Mahindra has bought several companies. Telecom, which comprised almost all of the company's revenues till about 2010, now comprises about 50 per cent. Thanks to its acquisition-led strategy, Tech Mahindra is today a Rs 22,612-crore (consolidated revenues) company, and has its target of $5 billion revenue within its sight. The primary driving forces behind the company's growth are Nayyar and his long-time colleague and good friend CP Gurnani, who is Tech Mahindra's CEO & MD. "From a strategic accounts perspective, Nayyar has influenced the company's big-ticket accounts that needed a dealmaker of his kind, while Gurnani is very international in his approach and very hands-on in technology," says Sanchit Vir Gogia, CEO and Chief Analyst of Greyhound Research. "Nayyar brings with him a different level of repertoire because of his government and World Bank experience, and his network is very important for the company as well."
BEST CEO MID-SIZED COMPANIES: TECH MAHINDRA LTD
- INCOME/ 3-YR CAGR: Rs 19,639 cr/ 55 per cent
- OP. PROFIT/ 3-YR CAGR: Rs 2,867 cr/ 52 per cent
- PAT/ 3-YR CAGR: Rs 2,195 cr/ 61 per cent
- AVG MCAP/ 3-YR CAGR: Rs 55,872 cr/ 89 per cent
- AVG MCAP (APR-SEPT 2015)/YOY GROWTH: 11 per cent
- ROE/ ROCE: 22.8 per cent/ 29.2 per cent
- CASH/DEBT: Rs 1,820 cr/ 5 crore
- NET PROFIT MARGIN: 11.80 per cent
PAT: profit after tax standalone data; operating profi t excludes other income
Figures in Rs crore; Average market cap: Average of daily market capitalisation of latest financial year;
Total income, PAT, RoE: Net of extraordinary income and expenses for the latest financial year
Source: Ace Equity
In many ways, the new, diversified DNA of Tech Mahindra matches the persona of its vice chairman. Born in 1938 in Lahore, Nayyar's family moved to India during Independence. His experiences range from being a district magistrate to director in the Department of Economic Affairs at the Centre to head of energy vertical at the World Bank. He was the founder chairman of Gas Authority of India, then following another World Bank stint, had corporate stints at HCL and, finally, Tech Mahindra. At Tech Mahindra, he and Gurnani first decided to gain strength in telecom before looking elsewhere. And after buying the business of Satyam in 2009, the company began to diversify.
The Acquisitive Instinct
Tech Mahindra's acquisitions over the past three years have been aimed at bolstering its capabilities in different areas, including in telecom. The most significant acquisition it has made was in 2014, that of US-based Lightbridge Communications Corporation or LCC, a company with presence in over 50 countries, and which had built 350 networks and designed more than 350,000 cell sites for more than 400 customers worldwide. "In telecom, we were there in every segment except the base segment, which was with Ericsson and Huawei," explains Nayyar. "LCC was looking at networks and network management, so if we wanted that capability, the only way we could do it was to take that company on."
Tech Mahindra is now able to leverage LCC's capabilities to its benefit. For example, the transition from authoritarianism to democracy in Myanmar has given the country a new gift - mobile phones. "We are putting up the towers (through sub-contractors), networks, operating them, connecting them, making them work, etc.," says Nayyar. "Very soon we are going to go away from switches to software-enabled switching. And we are right there. So, for me, it was a strategic decision." Analysts, too, agree it was a good move. "That acquisition made Tech Mahindra the largest player in network services amongst IT services companies in India," says Gogia. "LCC not only brought software-defined architecture, but also managed services capabilities."
This March, Tech Mahindra bought Swiss IT firm SOFGEN Holdings Ltd, which specialises in financial services, especially in private wealth, commercial and retail banking solutions. Earlier, in April 2014, it bought 75 per cent stake in US-based start-up FixStream Networks Inc, which was engaged in analytics, Big Data and cloud. In February 2014, it announced the acquisition of BASF Business Services Consult GmbH to expand its footprint in Germany and Western Europe, and strengthen its application and infrastructure services businesses. The same year, Tech Mahindra sought to develop capabilities in the 'Internet of Things' by partnering with chip-design firm Texas Instruments to set up a research lab in Bangalore. In November 2013, the company amalgamated Mahindra Engineering Services with itself to boost its engineering services prowess, especially in the areas of auto and aviation. In May 2013, the company bought majority stake in Complex IT - one of the largest SAP consulting providers in Brazil - which gave it muscle in the country's enterprise solutions market. In September 2012, the company bought 51 per cent stake (subsequently raised to 67 per cent) in Comviva from Bharti Airtel, to boost its capabilities in mobile VAS solutions. "The companies they have acquired are quite small and niche," says Jeenendra Bhandari, Partner at M&A advisory MGB & Co. LLP. "They have not acquired a huge company. They are more focused on getting a foothold in BFSI and other specialised areas."
As a result, Tech Mahindra now offers solutions across engineering, healthcare, aviation, automotive, banking & finance, among others. Mayuresh Joshi, Fund Manager, Angel Broking, points out that companies like TCS and Infosys are already very strong in these verticals, and it is imperative for all top companies to have presence in them. "We are working for Volvo, Volkswagen, Ford, Nissan...we are doing all the electronics for Airbus A380, all 540 km of wiring," says Nayyar. "We are doing health management of planes for Bombardier." With Tech Mahindra's solution, Bombardier is able to monitor the condition of its planes in-flight, "so that the right correction is made when the plane lands" - something that is normally done manually after a plane lands.
But there are definitely challenges, especially given that Tech Mahindra has been in the holistic IT services game for all of five years, since buying Satyam. It is adding clients at a good pace, but is still playing catch-up. "Tech Mahindra's active clients at the end of Q2 are close to 788, compared to 649 at the end of Q2 last fiscal," says Joshi of Angel Broking, whereas Infosys's client base is close to 1,000. At the same time, Infosys is into many more verticals, has strong presence in BFSI through its core banking product Finacle, and many other advantages.
MILESTONES
- 2009: Tech Mahindra acquires Satyam Computer Services through a government-mediated auction. The company is rebranded as Mahindra Satyam
- 2012: Acquires a 51 per cent stake in Comviva Completes Satyam merger, becoming the fifth biggest IT firm in India 2013
- 2012: Buys Hutchison Global Services for $87.1 million
- 2012: Acquires a 51 per cent stake in Comviva
- 2013: Buys SAP solutions provider Complex IT
- 2013: Completes Satyam merger, becoming the fifth biggest IT firm in India
- 2014: Acquires Lightbridge Communications Corporation, a network services company; analytics & big data company FixStream and BASF Business Services Consult GmbH
- 2015: Acquires SOFGEN Holdings, a Swiss IT firm catering to the needs of the financial services industry
Then, the acquisitions have squeezed margins badly, leaving the company with the lowest margins amongst its peers. Its operating profit margin for FY 2014/15 was 17.81 per cent compared to 58.28 per cent for Infosys, 46.98 per cent for HCL, 35.37 per cent for TCS, and 28.1 per cent for Wipro. And net profit margin for Tech Mahindra was 11.77 per cent, compared to 46.62 per cent for Infosys, 37 per cent for HCL, 26.17 per cent for TCS, and 19.68 per cent for Wipro. Nayyar, though, is undeterred and more focused on buying the right companies to broaden Tech Mahindra's offerings. There's another aspect, too. Tech Mahindra's low margins, according to Gogia, are largely an effect of its focus on infrastructure management and testing, its traditional strengths.
"(Future) growth will come from the diversification of portfolios, and new uses which are emerging consequent to digitisation," says Nayyar. So, big data, analytics, mobile VAS become critical. He feels - as do most of the other top Indian IT companies - that digital solutions are the future. "Automation is coming everywhere. When machines start talking to machines, what do people do?," he muses. "You want a taxi or a hotel room or the dinner you order, it is all digitised." While the realisation is there and so is the attempt to strengthen the company in this key area, analysts are not satisfied with the moves so far. "Its focus on the digital practice has been rather sluggish," says Gogia of Greyhound research. "They should have been a little more aggressive." He adds that even as the trajectory for Indian IT companies, going ahead, is expected to be to develop their own software products, Tech Mahindra should invest more time and effort in this regard. The Bombardier solution is a start, but these are few and far between.
And competition is never far away; not just from the big boys. Tech Mahindra recently failed to bag a deal worth $300 million - with the potential to go to $500 million in five years - from South African telecom giant MTN. The company it lost to was not TCS or Accenture or one of the other top companies, but a small, niche outfit called ISON Group, headquartered in Nigeria and run by Ramesh Awtaney, an Indian who played a key role in IBM bagging Bharti Airtel's landmark IT outsourcing deal a decade ago. "It does hurt? we felt very bad about losing this one," says Nayyar. "But it's part of life. You win some, you lose some."
