Hold Tech Mahindra; target of Rs 650: Emkay

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Hold Tech Mahindra; target of Rs 650: Emkay

Emkay Global Financial Services has recommended hold rating on Tech Mahindra with a target of Rs 650, in its February 9, 2012 research report.

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Emkay Global Financial Services has recommended hold rating on Tech Mahindra with a target of Rs 650, in its February 9, 2012 research report.

"Tech Mahindra's Dec'11 qtr performance missed relatively sanguine expectations (we est a 1% QoQ growth) with co reporting a 2.5% QoQ decline in rev to US$ 289 mn (~200 bps sequential cross currency hit). Mgns improved by <100 bps sequentially to 16.2% despite ~11% QoQ currency depreciation tailwind and ~200 bps offshore shift impacted adversely by ramp downs at the top client (revenues from BT declined by ~6% QoQ to ~GBP 64 mn , -8% QoQ in US$ terms) and transitions on some of the recent deal wins. Profits at Rs 2.7 bn (+15% QoQ) missed expectations driven largely by miss on op performance despite aid from lower taxes (co reported a 17% tax rate V/s 22% in Sep'11 qtr). Overall HC declined by ~900 people QoQ to 42,746 with IT svcs HC reducing sharply by ~1,500 QoQ during the qtr to 25,200 ( note that IT Svcs headcount has reduced by ~10% over the past 2 qtrs). Op metrics was weak with rev from top 5 and top 10 clients declining by ~4% QoQ each ( top 2-5 client revenues were flat QoQ , discussions with co mgmt indicate that revenue growth at a major North American telco was also tepid impacted by lower no of billing days)"

"Business from the top client has been under renewed pressure in the recent qtrs after being relatively stable for several qtrs prior to that. Co mgmt indicated that the retendering within BT was expected to get completed over the next 2-3 qtrs with company having managed to maintain it's market share on projects already renegotiated by now. Mgmt indicated that ramp downs on certain projects as well as volume/pricing discounts at BT will continue to be margin headwinds over the next few quarters. We note that TechM's mgns have already fallen sharply by ~1100 bps since March'09 levels and will see further downward resets post the retendering at the top client albeit a weak currency will offset some of these headwinds."

"We moderate our US$ rev estimates further (build in 3.3%/6% US$ rev growth V/s 5%/11% earlier) , however lower currency resets coupled with higher share of contribution of profits from Mah Satyam drive a 9%/1% raise in our adjusted consolidated earnings. While valuations at <8x standalone P/E will limit sharp absolute downside, we see no upside triggers on account of continuous challenges on op performance. Retain HOLD, TP Rs 650," says Emkay Global Financial Services research report.

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