Accumulate Tech Mahindra; target of Rs 1100: PLilladher

“Tech Mahindra’s Q3FY13 results were ahead of our expectation. The company reported revenue of Rs17.91bn (PLe: Rs17.71bn, Cons: Rs17.59bn), a growth of 9.8% QoQ (10% QoQ in USD terms). Operating margins improved by 31bps to 21% (PLe: 19.7%, Cons: 19.4%), despite integration with Comviva and HGS. Excluding Satyam, PAT grew by 40% to Rs.2.48bn (PLe: 1.76bn), due to forex gain of Rs301m (Q2FY13 loss of Rs640m). EPS. contribution, including Satyam.s, declined by 6.9% QoQ to Rs20.74 (PLe: Rs23.34, Cons: Rs22.47).”

“The management continues to see stronger deal pipeline for the large deals. As telecom service providers .need to do more for less., the opportunity for a player like TechM emerges. The company sees improved traction in Managed Service deals also. There are 5-6 large deals in the pipeline of which 2-3 are in advance stages. Despite full integration of HGS and Comviva, TechM managed to improve margin by 31bps. According to the management, utilization level is peaking out along with currency headwinds. The management sees tailwind from productivity improvement, weeding out of less profitable projects and pyramid rationalization.  Revising our estimates for FY13 and FY14 upwards (Exhibit 2).”

“We expect demand environment to be stable with recovery in deal pipeline from telecom service provider and aggressive inorganic strategy to improve the revenue momentum. Moreover, Satyam would provide respite at the bottom-line. We retain our accumulate rating, with a TP of Rs1100, 10x FY14e earnings estimate,” says Prabhudas Lilladher research report.

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