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December 21, 2006

Tech Mahindra signs $1bn BT deal

IT services vendor Tech Mahindra Ltd has announced a $1bn contract with BT Group, causing its share price to rocket by 20%.

By CBR Staff Writer

The deal is the largest publicly announced win by an Indian offshore provider to date, and helps propel Punebased Tech Mahindra into the big league. The company only went public in August, but its share price has quadrupled from its initial public offering price, and it now has a market capitalization of around $3.9bn, making it the sixth most valued Indian player, just behind HCL Technologies.

According to a spokesperson for Tech Mahindra, it will provide business process management, business transformation, and network-centric IT services, the vast majority of which will be for BT Global Services’ external clients, though it will also provide some services to support BT’s internal business.

It will begin work immediately, though the spokesperson said the first quarter would be mostly a period of learning, and that while it would recognize revenue from the deal in the quarter next year, it would take a while for revenues to ramp up. Margins are expected to be not much different from its overall business. For the three months to the end of September, its consolidated results showed revenue of $156m, generating an operating profit of $37m, and an operating margin of 23.5%.

A BT spokesperson said there would be no impact on its employees, or on its existing infrastructure services partnership with HP, and that BT and Tech Mahindra would create shared services centers together to support global customer contracts, most likely in India and China.

Tech Mahindra was formed by BT and Mahindra as a joint venture in 1998, known then as Mahindra British Telecom. BT was already Tech Mahindra’s largest customer before the deal was announced, responsible for 68% of its revenue in its most recent quarter, and is still a major shareholder. As part of the IPO, BT reduced its stake in Tech Mahindra to 36% from 42%, selling 5.73 million shares for $47m. It hindsight it may have sold those shares cheaply, as less than four months later they would fetch around $191m, but the value of its overall stake in the company has increased to $1.4bn.

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