Mphasis investors don’t fear margin dilution due to flickering
The latest acquisition of Blink by IT service provider Mphasis appears to have encouraged investors. The company’s shares hit a new record high of ??3,394 Thursday. As such, optimism around the IT sector has kept Mphasis shares on a steady rise this year.
On Wednesday, Mphasis announced it would be buying Blink Interactive, a user experience research and design company, for $ 94 million. The deal involves cash flow as well as talent retention costs over the next two years.
This acquisition is attractively valued and Blink’s cross-selling synergies would accelerate growth within Mphasis’ BFSI and high-tech verticals, analysts said. “The acquisition of Blink offers Mphasis the opportunity to increase its front-end design and engineering capabilities, and also to seize more downstream revenue opportunities, which in many cases is around 10 times the upstream income. This fits perfectly with Mphasis’ Front2Back transformation strategy, ”Motilal Oswal Financial Services Ltd analysts said in a September 22 report.
It should be noted that Blink has a reputable customer base in the high tech industry; its client list includes Facebook, Amazon, Microsoft and Google. “Although Blink’s revenue currently represents only 2.7% of Mphasis’s revenue, this acquisition offers significant growth opportunities,” Prabhudas Lilladher analysts said. with Blink will increase the addressable market share of Mphasis, ”the broker’s report added. CAGR is the abbreviation for compound annual growth rate. Blink’s estimated revenue for the 2021 calendar year is $ 30-35 million.
Of course, the new acquisition can have an impact on the company’s margins. Considering the higher depreciation and retention costs, Mphasis management forecast an impact of approximately 100 basis points (bps) on its margin. A basis point is one hundredth of a percentage point.
Management expects revenue synergies to be realized quickly to ease the margin challenges. However, even after taking this acquisition into account, the Mphasis Ebit margin guidance of 15.5-17% remains unchanged. Ebit is the abbreviation for profit before interest and taxes. Analysts say management’s confidence to protect margins is impressive and bodes well for investor sentiment towards the stock.
The integration of the two companies would be essential to achieve revenue synergies, according to analysts at Kotak Institutional Equities. “The integration of creative agencies with service companies is tricky and requires precautions due to cultural differences,” analysts said in a report dated Sept. 23.
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