TCS-MHP deal: Kotak sees potential to unlock value under select scenarios

Shares of Tata Consultancy Services (TCS) gained on Tuesday, August 25, as brokerages are mixed on the company acquiring 100% of Porsche's management and IT consulting subsidiary MHP for an enterprise value of €320 million.

Porsche and TCS have signed a five-year strategic partnership, which is valued at €1.25 billion.

MHP's revenue was €828 million in the 2023 calendar year, €830 million in 2024 and €724 million 2025. The deal will help TCS scale AI across the mobility value chain and SDV platforms. TCS gets industry expertise, customer access and a strategic anchor client with this deal.

Brokerages

Brokerages are mixed on the TCS stock with Kotak Institutional Equities having an "add" recommendation, HSBC having a "hold" rating and Citi having a "sell" rating.

Kotak Institutional Equities

The brokerage has an "add" rating and a target price of ₹2,450 per share, an upside of 7.4% from its previous close

It said the acquisition paves way for a five-year, €1.25 billion mega deal with Porsche, which involves TCS scaling AI programs.

It said the acquisition is inespensive and could be EPS neutral or accretive. It can provide to TCS under select scenarios, it said.

The brokerage said high reliance on the impacted German automotive sector and high client concentration pose downside risks. Maintaining business continuity with Volkswagen will be a critical monitorable, the brokerage added.

HSBC

The brokerage has a "hold" rating and a target price of ₹2,350 per share, an upside of 3% from its previous close.

It said the MHP acquisition addresses TCS' rare whitespace of presence in European autos and consulting practice.

The deal comes with committed revenues from the parent company Porsche, but the brokerage is of the view that the EPS impact may not be significant. It said integration challenges are often higher than anticipated.

Citi

The brokerage has a "sell" rating and a target price of ₹1,825 per share, a downside of 20% from its previous close.

It said that roughly assuming €600 to €700 million run-rate for FY28 and 7-9% EBIT margins, this would translate to 5-8x enterprise value/EBIT. Meanwhile, it may appear lower, Citi notes risk of a revenue decline and fact that cap and EPAM trade at 5.5x/8.2x EV/EBIT for the calendar year 2027.

Citi said it has also seen a few of these deals across sectors. While they could support growth in the near-term, the risk of the existing book declining on an annual basis increases with such transactions, it added.

TCS says MHP has 4,000 to 4,500 employees

The company told CNBC-TV18 that MHP gets only 30%-40% revenue from Porsche, while 60%-70% of its revenue comes from external clients. It added that the €1.25 billion commitment is not the entire opportunity. The company also sees MHP's €740 million revenue as the base and it is targeting double-digit growth from synergies. TCS CEO said he challenges the team to MHP to $1 billion revenue over time.

MHP's margins are currently at 1% and TCS said initially, the same could be diluted by 50 to 60 basis points.

MHP has 4,000 to 45,00 employees who are largely on site. TCS said it also sees an offshore shift as a key margin lever.

TCS told CNBC-TV18 that the revenue contribution is expected from the fourth quarter of this fiscal and the financial year 2028 as the first full year.
The company added that the deal would be earnings per share (EPS) accretive.

Stock Reaction

Of the 48 analysts who have coverage on the TCS stock, 29 have a "buy" rating, 14 have a "hold" ratingand five have a "sell" rating.

TCS shares were up 0.9% in early trade at ₹2,305 apiece on Tuesday. The stock has declined 28.6% this year, so far.

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