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Merger and acquisitions it sector in india

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This slide talks about the possible M&A scenario in the cluttered IT space in India.

This slide talks about the possible M&A scenario in the cluttered IT space in India.

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  • 1. Team Swastik
    Amit Rander (+91-8882052650)
    JeyaramRaveendran (+91-9540189873)
    1
    29-01-2011
    Wipro - Mindtree
  • 2. Information Technology Industry
    IT Services spending by Geography
    Industry Overview
    • World-wide technology and related products and services spend is estimated to have crossed USD 1.5 trillion in 2009,
    • 3. Total IT-BPO industry to reach USD 71.7 billion accounting for 5.8% of India’s GDP;
    • 4. Software and Services export revenues estimated to grow over 16-17% to reach USD 47 billion
    • 5. Direct employment of nearly 2.23 million
    Global technology spend forecast
    Key Growth Drivers
    • Low cost of delivery
    • 6. High caliber talent pool
    • 7. Robust process delivery
    • 8. Business environment and infrastructure
    • 9. Growing Indian market
    • 10. Transformational capabilities
    • 11. Global footprint
    • 12. Focus on sustainable growth
    Source:IDC-Nasscom Strategic Review 2010 , 2009
    TCS AR 2010, Gartner Forecast World Wide IT Spending
    2
    29-01-2011
    Wipro - Mindtree
  • 13. Acquirer- Wipro Limited
    Revenue breakdown by Geography and service lines
    Company Overview
    • Incorporated in 1945 and headquartered in Bangaluru, Wipro Limited , provides comprehensive IT Solutions and Services
    • 14. 3rd largest Software exporter in India
    • 15. The company has presence over 55 countries. The workforce consists of over 1 lakh employees serving over 800 clients
    • 16. Wipro gets an enviable 95 percent repeat business
    • 17. World’s first SEI CMM Level 5 Company
    Company Financial overview (Rs. Cr)
    Total = Rs.2,77,543 mm
    Top Management
    Source: Company reports , Capitaline
    3
    29-01-2011
    Wipro - Mindtree
  • 18. Wipro loosing its steam, underperforms its rivals and Sensex…
    Share price performance of major large Cap companies over the last year
    162
    128
    115
    109
    Increasing revenue gap with the Indian rivals remains a concern
    Source: Capitaline
    4
    29-01-2011
    Wipro - Mindtree
  • 19. The Strong Capital Structure Supports Expansion
    Capital Structure
    Sources of funds (INR mm except per share data)
    Liquidity Analysis
    Credit availability:
    • The term loans and external borrowings of Wipro require it to maintain certain ratios as covenants. The company has not breached them as of 31/12/2010.
    • 20. With funds available of more than 67,722 mm, the company should be in a position for acquisitions to the tune of Rs. 25,000 mm without hurting its balance sheet covenants.
    Source:Wipro Q3 data, Wipro AR 2010
    5
    29-01-2011
    Wipro - Mindtree
  • 21. Possible Target – Mindtree Limited
    Percentage revenue by industry (Q3’11)
    Company Overview
    • MindTree ,incorporated in 1999, is a global IT Solutions company specializing in IT Services, Independent Testing, IMTS, Knowledge Services and Product Engineering, which comprises of R&D Services, Software Product Engineering and Wireless Products.
    • 22. The company recorded a net profit of Rs.215 cr. on revenues of Rs.1373 cr. for the year ended 31/03/2010 and Rs.30.5 cr. on revenues of Rs.394.4 cr. for the Quarter ending 31/12/10.
    • 23. 269 customers,48 Fortune 500 Companies
    Marketable
    Molecules
    CRAMS
    Total = Rs.394 cr.
    Share price performance of Mid cap IT companies over the last one year
    Rs.
    131
    113
    106
    85
    80
    43
    Source:Mindtree company reports, Capitaline
    6
    29-01-2011
    Wipro - Mindtree
  • 24. Mindtree Valuation - DCF
    Source: Company reports,
    Note:The data is just a sample of one pair of values of Beta and Terminal growth rate. Please refer to the excel sheet for te entire valuation
    7
    29-01-2011
    Wipro - Mindtree
  • 25. Sensitivity analysis for Beta and Terminal growth rate
    Terminal growth rate
    Beta
    The values denote the intrinsic share price of the company.
    The projected share price represents a premium of 16% - 25% to the average price of Mindtree over the last 30 days. The premium is slightly higher but brings to the table a diversified portfolio and new product lines for Wipro
    Source:Company reports, Capitaline
    Note: The P/E and EV/EBITDA are forward multiples. They represent the FY12 ie March ‘12 multiples
    8
    29-01-2011
    Wipro - Mindtree
  • 26. The projected share price is in line with the industry standards
    Valuation analysis
    • The acquisition price suggested represents an FY’12 PE multiple in the range of 9.2-10.0 and an EV/EBITDA multiple of 5.3-5.7
    • 27. Although the multiples are greater than the estimated FY’12 multiples, they are still at a discount to the industry average
    • 28. Recently Patni Ltd. was acquired by I-Gate which commanded forward multiples of 10 (PE) and 6.5 (EV/EBITDA) respectively.
    Possible concerns about the projections
    • Slower recovery in Europe and US:Due to high exposure to R&D/PES space, a slow recovery or another dip is likely to negatively impact the growth prospect of the company
    • 29. Backlash against offshore outsourcing: There could be regulatory or visa restrictions and customers might defer decisions, leading to lengthening sales cycles. The possibility of such a backlash in the medium term looks low
    • 30. Rupee appreciation: A sudden appreciation in rupee could erode the operational growth delivered by the company
    • 31. Volatility in Margins: The margins of the company have decreased over the last year. The valuations might be dented if they do not improve. Considering that the company has absorbed its restructuring costs due to acquisitions, the margins should improve
    Source: Capitaline , Mindtree AR, Refer Excel workings for Valuation
    9
    29-01-2011
    Wipro - Mindtree
  • 32. Synergies
    =
    +
    • Entry into PES and R&D Services Domain.
    • 33. Entry into Wireless and mobility product domain.
    • 34. Access to the well diversified clients of Mindtree (Volvo, Microsoft, Symantec, HUL, Pepsico etc)
    • 35. Get a boost in the BFSI sector.
    • 36. Safeguard the position as the third largest IT exporter in India.
    • 37. Combined revenues of greater than Rs 320bn and Combined EDITDA of Approximately 75bn.
    • 38. Combination will bring together world class leadership that can create scale synergies and growth.
    • 39. Increased access to global customers and entry into new geographies.
    • 40. Well diversified client based.
    • 41. Cross-selling opportunities.
    Marketable
    Molecules
    Total Revenues (TTM): Rs. 14.978 mm
    Total Revenues (TTM): Rs. 3,04,270 mm
    • One of the largest IT services company in India.
    • 42. Strong Brand.
    • 43. Robust Quality Process.
    • 44. Global Delivery Footprint.
    • 45. Huge Client base.
    • 46. Looking for newer growth opportunities.
    • 47. IT products business.
    • 48. Diversified services offering strong presence in growth area like R&D and PES.
    • 49. IDC forecasts a five-year CAGR of 14% for R&D/PES
    • 50. Has grown at a CAGR of 45% over the last eight years (2002-10).
    • 51. Multiple levers to maintain stable margin with accelerated growth.
    • 52. Wireless product portfolio.
    Source:Mindtree company reports, Wipro Company Report.
    10
    29-01-2011
    Wipro - Mindtree
  • 53. Deal Structure
    Shareholding pattern of Wipro
    Shareholding pattern of Mindtree
    Wipro can buyout the entire 32% promoter stake, followed by a 20% open offer in the market which could give it a controlling stake.
    It can also look forward towards buying out the entire company if the institutional investors agree to it
    Total no of shares = 38,63,090
    Total no of shares = 38,63,090
    Deal type
    All cash deal
    • The deal would be an all cash deal, with the acquisition price being anywhere in the range of Rs.25,000 mm to Rs. 27,000 mm for a 100 % stake. The price would be in proportionate with the stake acquired
    • 54. The entire amount should be funded by the balance sheet assets (cash and marketable securities). If any debt covenants are breached (a rare possibility), the company can raise equity for the same but it will dilute the earnings.
    Mindtree Top Management
    Top management concerns
    Mindtree was co founded by 3 ex-Wipro eecutives. As of now , Mindtree has many key members as Wipro alumni including Mr. Ashok Soota.
    The new management would have those members on board as well. This could actually be a blessing in disguise as the employees are accustomed to the Wipro culture and can easily adjust .
    It would be easier for the new management to take strategic decisions without a lot of friction between them
    Source:Capitaline for ownershi data,, Company AR and Q3 results
    11
    29-01-2011
    Wipro - Mindtree

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