Buy Tech Mahindra; target Rs 1225: Motilal Oswal

Motilal Oswal is bullish on Tech Mahindra and has recommended buy rating on the stock with a target price of Rs 1,225 in its February 18, 2013 research report.

"Tech Mahindra is part of the USD12.5b Mahindra Group. Company is one of India's largest software exporters and serves telecom service providers, equipment manufacturers, software vendors and systems integrators, having offices in over 13 countries. It employs over 49,000 people and its key clients include British Telecom and AT&T.

Deal pipeline is healthier than that in the past couple of quarters and the environment has steadied in comparison to the gloomy outlook in the recent past. Deal activity is strong in verticals like healthcare, while manufacturing is steady. BFSI is seeing deals around risk, governance and compliance.

Satyam's acquisition will help Tech Mahindra to diversify its client base and industry focus. Large deals like those of Bharti and a gradual revival in the telecom vertical will help volume growth. Deals have kept growth coming (outside the BT account) despite challenged IT budgets in the telecom vertical.

Pent up demand in discretionary spending is reasonably high, which could compound to the improving outlook, potentially driving better growth in FY14. As of now, a lot of deal activity is around IMS and Enterprise related work.

We expect TECHM to post USD revenues (ex-Satyam) at a CAGR of 10.3% over FY13E-15E. In line with the company's guidance, we factor a decline in BT revenues for the next two quarters followed by stable revenues there on. TECHM's continued impressive execution on the profitability front keep us sanguine on margins. We upgrade FY14E/15E EBITDA margin estimates by 97bp/142bp. Higher margins drive 1%/5.5% increase in our EPS estimates over FY14E/15E.

Valuation and View: The stock trades at 10.3x FY14E EPS and 9.0x FY15E EPS. We value TECHM at a 25% discount to our target multiple for HCLT due to: [1] relatively smallerscale, [2] skew of revenues towards telecom vertical and [3] increasing proportion of BPO revenues. Our target price for TECHM is INR1,225, which discounts FY15E EPS by 10.5x. Buy the stock," says Motilal Oswal research eport.

FIIs holding more than 30% in Indian cos

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