ANALYSIS. Tech Mahindra’s Pininfarina buy to be earnings dilutive

Tech Mahindra and Mahindra & Mahindra (M&M) have together acquired 76.06 per cent stake in Pininfarina, a well-known Italian brand in engineering services and automotive design space that has designed cars for Ferrari and Rolls-Royce.

The acquisition will be done through a special purpose vehicle (SPV), in which Tech Mahindra will hold 60 per cent stake.

Together with the payment to public shareholders of Pininfarina in the open offer, and the amount likely to be infused through the planned rights issue, the total cost of the deal works out to €53 million. Further, the two companies will also be providing a corporate guarantee for €114.5 million to the creditors of Pininfarina.

Since its acquisition of Satyam, Tech Mahindra has been scouting to acquire companies to enhance its design and engineering capabilities. Two years back, it acquired Mahindra Engineering Services and took many of the big automotive clients on board. Now, it has acquired Pininfarina, to scale up its enterprise services business.

The Italian company boasts of clients such as BMW, Ferrari, Fiat, GM, Lancia and Alfa Romeo.

Tech Mahindra expects to cross sell its engineering capabilities to these clients and also expand into Italy and Germany. Also, Tech Mahindra can use the acquired design capabilities and serve its existing clients better. Currently, manufacturing sector makes up a third of Tech Mahindra’s revenues. Of the 100-plus customers in this space, 25 are from the automotive space — largely OEMs.

In the September quarter, the company had reported large deal wins with TCV (Total Contract value) of $300 million. Sixty per cent of this was in the enterprise segment.

In calendar year 2014, Pininfarina reported revenue of €86.5 million (or ₹637 crore), which is about four per cent of Tech Mahindra’s full year revenues.

Pininfarina reported operating profit of €7 million, but incurred loss at the net level.

Over the past several years, Pininfarina has been making losses. Though, some of its woes are due to the demand-led slowdown in the Europe (contributes over 60 per cent of revenues), its huge debt and interest costs are also to be blamed. The company has a total debt of about €90 million and cash of about €35 million.

In the near-term the acquisition will be earnings dilutive for Tech Mahindra. Possible cost savings through synergies in operations and increase in offshore business is unclear at this juncture.

Given the small size of the acquisition, there may not be a significant impact on earnings.

Tech Mahindra’s recent acquisitions too, have been margin dilutive. In the recent September quarter, the company has been able to improve its margins, thanks to tailwinds from better utilisation, increase in offshore business and cost management.

COMMENT NOW