Buy Tech Mahindra; target of Rs 1225: Motilal Oswal

Motilal Oswal is bullish on Tech Mahindra and has recommended buy rating on the stock with a target of Rs 1225 in its February 7, 2013 research report.
 
“TECHM's 3QFY13 revenues at USD329m grew 10% QoQ, above our estimate of USD323m (up 7.9% YoY). Organically, revenues were flat QoQ v/s our estimate of 2% sequential decline. EBITDA margin at 21% (up 30bp QoQ) was a key positive surprise v/s our estimate of 19.7%. PAT before share of Satyam's profits was INR2.4b, above our estimate of INR2.08b. Revenues from BT declined to USD96m from USD99m in 2QFY13, in line with our expectation. Non-BT revenues grew 2% QoQ organically v/s our estimate of a slight decline during the quarter. Incremental revenue from acquisition was USD30m (in-line). Beat to margin estimate was largely on account of headcount rationalization. Overall headcount declined by 1,420 employees, despite 1,546 employee additions from Comviva. BPO headcount declined by 2,438 employees.”
 
“BT revenues are expected to decline for another two quarters before stabilizing, due to ongoing consolidation at the client's end. However, rampups in deal-wins should offset the impact and facilitate organic revenue growth. BPO revenues increased from 5.9% in 1QFY11 to 19.6% in 3QFY13. During this period, EBITDA margin expanded by 220bp to 21%. 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. The stock trades at 9.5x FY14E EPS and 8.4x FY15E EPS. We value TECHM at a 25% discount to our target multiple for HCLT due to: [1] relatively smaller scale, [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,” says Motilal Oswal research report.

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