Tech Mahindra shares hit 6-year high post Q1 earnings

Moneycontrol Bureau

Tech Mahindra shares touched nearly 6-year high of Rs 1,337 on the Bombay Stock Exchange after it reported first quarter operational earnings in-line with forecast and strong profit after tax on higher other income.

The software service exporter's first quarter consolidated net profit rose higher-than-expected 7.6 percent sequentially to Rs 686 crore on higher forex gain. Analysts on an average had expected it to report net profit of Rs 611 crore.

Consolidated rupee revenue grew by 8.9 percent quarter-on-quarter to Rs 4,103 crore while dollar revenue increased 3.7 percent to USD 724 million, which both were slightly above the forecast.

"Currently, we are seeing traction in Europe and Africa, but better traction in greater potential places like Australia, New Zealand, and United States will be good. We can do better and will capture opportunities when they arise”, says Vineet Nayyar, executive vice chairman of Tech Mahindra.

Key positives: Operating profit margin expanded by 60 bps during the quarter while active clients increased by 10 percent Q-o-Q and revenue from North America was up by 11.1 percent sequentially.

Brokerages' take:

Post earnings, brokerage houses (on an average) raised earnings per share forecast on the stock to around Rs 120 from Rs 111.

Deutsche Bank has a buy rating on the stock and raised its target price to Rs 1,500. The brokerage house expects the combined entity (Satyam merged with Tech Mahindra) to deliver dollar revenue compounded annual growth rate of over 14 percent over FY14-16. Its FY14 earnings per share estimate for the merged entity is 127, says Deutsche Bank.

Meanwhile, Citi has maintained neutral rating on the stock and upped target price to Rs 1,340 from Rs 1,120. "We have upgraded FY14-15 expected PAT by around 4-7 percent (buoyed by other income, deferment of wage hikes) and raised multiple slightly (11 times September FY14 expected EPS from 10 times)," Citi report said.

Kotak has add rating on the stock and raised target price to Rs 1,430 from Rs 1,100 earlier. "We raised FY2014-16E consolidated EPS estimate by 22-25 percent, majority of which is rupee driven," Kotak report said.

Bank of America Merrill Lynch has maintained buy rating on the stock while Credit Suisse upgraded it to outperform from neutral. Former upped target price for the stock to Rs 1,375 from Rs 1,150 while latter raised to Rs 1,500 from Rs 1,040.

However, CLSA has an underperform rating on the stock.

"The sequential growth of 3.7 percent growth in USD revenues was in-line with expectations, boosted somewhat by complex IT acquisition. The key highlight of June 2013 results was yet again the good margin performance (+60 bps Q-o-Q) albeit aided by a weak INR. While the stock has done very well through the last year with margin upsides driving earnings upgrades, returns hereon are contingent on valuation re-rating on which we are not convinced yet in absence of consistent organic revenue growth," CLSA report said.

At 15:24 hours IST, the stock rose 4.89 percent to Rs 1,327.65.