IT services provider Mphasys’ latest acquisition of US-based Blink has delighted investors. Firm’s shares set a new record ₹3,394 on Thursday. As such, optimism around the IT sector has kept Mphasis shares on a steady climb this year.
On Wednesday, Mphasis said it would buy Blink Interactive, a user experience re-arc and design firm, for $94 million. The deal includes cash plus talent retention costs over the next two years.
Analysts said the acquisition is attractively priced and that Blink’s cross-sell synergies will drive growth within Mphasis’ BFSI and high-tech verticals. “The acquisition of Blink provides Mphasis an opportunity to add to its front-end design capabilities and engineering-related functions, and also capture more downstream revenue opportunities, which in many cases is approximately 10 times upstream revenue. Motilal Oswal “This aligns perfectly with Mphasis’ front 2 back transformation strategy,” analysts at Financial Services Ltd said in a report on September 22.
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It should be noted that Blink has a huge customer base in the hi-tech industry; Its client list includes Facebook, Amazon, Microsoft and Google. Analysts at Prabhudas Lilladher said, “Although Blink’s revenue currently accounts for only 2.7% of Mphasis’ revenue, this acquisition offers significant growth opportunities. Revenue growth is on the rise as Blink clocked 42% CAGR in FY17-20 And there is strong market synergy. With Blink will expand Mphasys’ addressable market share,” the broker’s report added. CAGR is short for Compound Annual Growth Rate. Blink’s estimated revenue for calendar year 2021 is $30-35 million.
Of course, the new acquisition could have some impact on the company’s margins. Given higher amortization and retention costs, Mphasis management has guided for an impact of approximately 100 basis points (bps) on its margins. One basis point is one hundredth of a percentage point.
Management expects early realization of revenue synergies to minimize margin headwinds. However, even after taking this acquisition into account, Mphassis Ebit margin guidance remains unchanged at 15.5-17%. Ebit is short for earnings before interest and tax. Analysts say the management’s confidence in safeguarding margins is impressive and bodes well for investor sentiment towards the stock.
Analysts at Kotak Institutional Equities say integration of the two businesses will be crucial for realizing revenue synergies. “Integration of creative agencies with service firms is difficult and requires care due to differences in cultures,” analysts said in a September 23 report.
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