IDFC sees Tech Mah @ Rs 3200, rates KPIT Tech as outperform

Placing a target of Rs 3200 on the Tech Mahindra stock, IDFC Securties' IT & Telecom Analyst, Hitesh Shah says the company was its top recommended pick for two long years.

On Thursday, Tech Mahindra acquire 100 percent of US-based network solutions company Lightbridge Communications Corporation (LCC) for USD 240 million. Shah says the buyout will be incrementally positive for Tech Mahindra, doubling its addressable market in telecom space.

Below is the transcript of Hitesh Shah’s interview with Latha Venkatesh & Anuj Singhal on CNBC-TV18.Anuj: How do you view Tech Mahindra and its recent acquisition and what is your call on the stock?A: Tech Mahindra acquired this company which is focused on network services a new service area that company had organically got into about in 18-24 months back and they have already bagged two large deals there, one from KPN and other from UK based tier-I services provider. Clearly this double addressable market for Tech Mahindra in the telecom space. Global telecos spend about USD 40 billion globally in IT services, IT spending and another USD 40 billion on network services. Having done this acquisition, a) they double their addressable market in their telecom space, b) they get the expertise of network services which is very difficult to hire in India at this point of time and they get 20 new clients in some of this newer geographies like South Korea, Latin America, Africa to which they can cross sell their IT services as well.So, I see this acquisition as incrementally positive. Also the kind of valuation that they had paid seven times trailing 12 months enterprise value (EV) earnings before interest, taxes, depreciation, and amortization (EBITDA) is not very expensive. Even if they can grow their EBITDA by about 15-20 percent over the next 12 months or so we would see that this money which they are spending in the acquisition would almost generate 20 percent of yield for them vis-à-vis cash generating 9 percent pre tax yield.So I view this acquisition of Tech Mahindra as positive. We continue to like this name; it has been our top pick for more than two years now. We have reiterated the same with a target price of Rs 3,200 in this morning.

Latha: Any other midcap IT companies that you like?A: We like couple of businesses. We like the business model of Persistent Systems which has significant social mobility analytics and cloud revenue coming for them. We also like Mindtree but valuations of both these companies are not comfortable or do not have enough margin of safety. And to that extent we rate Persistent and Mindtree as neutral.The only small-midcap IT services names where we have outperformer rating on is KPIT Cummins India (now KPIT Tech). They had really bad calendar 2013 and a bad first half of calendar 2014. We upgraded them recently as we believe they are turning the corners; there was a good September quarter for them and we believe that FY16 or CY15 would be really good years from a KPIT perspective.