Feb 14, 2013 02:06 PM IST | Source:

Hold Tech Mahindra; target Rs 1120: Sushil Finance

Sushil Finance has recommended hold rating on Tech Mahindra with a target price of Rs 1120, in its February 08, 2013 research report.

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Sushil Finance has recommended hold rating on Tech Mahindra with a target price of Rs 1120, in its February 08, 2013 research report.

"Tech Mahindra's quarterly performance was better than the expectations. During Q3FY13, its USD Revenues grew 10.1% QoQ to USD 329.4 mn, led by complete consolidation of HGS’ Revenue (USD 37 mn) acquired in Q2FY13 & about 19 days contribution of Comviva’s Revenues (USD 6 mn), which was acquired as 51% subsidiary effective 12th Dec 2012. While the BT Revenue declined 3.3% QoQ due to its continued internal rationalization program, the Non-BT Revenue grew by decent 2% QoQ (excluding the contribution of HSG & Comviva). Its INR Revenues grew by 9.8% QoQ to Rs.17,911 mn. We expect the company to deliver strong QoQ Revenue growth in Q4FY13 on account of full impact of consolidation from Comviva (~USD 20-25 mn).

Its EBITDA for Q3FY13 grew 11.4% QoQ to Rs.3,763 mn, while the EBITDA margins grew 30 bps QoQ to 21%. The growth in margins can be attributed improved employees productivity & rationalization of few low margin projects. With sharp increase in other income & exchange gain (Rs.121 mn vs loss of Rs.695 mn in Q2), its PBT grew 62.5% QoQ to Rs.3,296 mn and its APAT grew 59.2% QoQ to Rs.2,417 mn. However, its RPAT including share of Mahindra Satyam grew 2% QoQ to Rs.2,758 mn. Though margins are expected to remain stable in Q4FY13, we expect ~150-200 bps cut in margins in FY14 due to full impact of HGS & Comviva consolidation and to stabilize thereafter at 19-19.5% level.

During Q3FY13, the company closed few large deals with TCV of USD 100 mn in Europe & Asia pacific regions from leading telecommunications service providers. Despite the customers taking longer time in decision making, the deal pipeline looks decent as the company is chasing 4-5 large deals which are likely to be finalized in upcoming quarters.

Tech Mahindra acquired 100% stake in Hutchison Global Services (HGS) for Rs. 4,851 mn during Q2FY13 and 51% stake in Comviva Tech for Rs.2,600 mn during Q3FY13. The acquisition of HGS will enhance its expertise in the customer management space and enable Tech Mahindra to leverage the acquired capabilities for expanding its existing services to other parts of the Hutchison group. With over 11,500 employees, HGS provides customer lifecycle operations to clients in UK, Ireland and Australia. As part of the deal, the clients of HGS have committed to procure services worth USD 845 mn over next 5 years. Comviva is the global leader in providing mobile VAS and financial solutions. Comviva’s solutions are deployed by over 130 service providers and banks in over 90 countries and power services to more than a billion mobile subscribers globally. The management expects to deliver annual Revenue of ~USD 160 mn from HGS and ~75 mn from Comviva.

With over 25% CAGR in last five year in Non-BT accounts, compensating for decline in BT account, Tech Mahindra expects its Non-BT accounts to deliver decent growth, while BT’s revenue is expected to muted in short-term due to its internal rationalization program and stabilize going forward. Moreover, the merger of Mahindra Satyam will further benefit the company by de-risking its business profile with more balanced industry, geography & client diversification, and business synergy by leveraging the expertise of both the companies.

Considering its 9MFY13 performance and business outlook, we have largely maintained our FY13E & FY14E Revenue estimates, while on account of better than expected margins we have upgraded our FY13E & FY14E APAT estimates. We now expect Tech Mahindra to deliver 21% CAGR in Revenue and 17.2% CAGR in APAT during FY12-14E. At CMP of Rs.1002, the stock is trading at 10.5x & 8.9x its FY13E & FY14E Earnings of Rs.95.5 & Rs.112 respectively. We have valued the company at 10x its FY14E EPS and maintain our ‘HOLD’ Rating with an increased target price of Rs.1120," says Sushil Finance research report.

Non-Institutions holding more than 90% in Indian cos

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