Hold Tech Mahindra; target of Rs 1080: Sushil Finance

Sushil Finance has recommended hold rating on Tech Mahindra with a target of Rs 1080, in its November 7, 2012 research report.

“The quarterly performance of Tech Mahindra was better than the expectations. During Q2FY13, its USD Revenues grew 6.4% QoQ, led by consolidation of one month Revenue of Hutchison Global Services (HGS) which was acquired effective 4th Sept 2012. While the BT Revenue declined 3.8% QoQ due to its continued internal rationalization program, the Non-BT Revenue grew by decent 4.8% QoQ and including of USD 13.3 mn contribution from HSG, the Non BT Revenue grew 12% QoQ. INR Revenues grew by 5.7% QoQ to Rs. 16,314 mn. We expect Tech Mahindra to deliver strong QoQ Revenue growth for next two quarters on account of full impact of consolidation from HGS in Q3 (USD 40mn) and expected consolidation from Comviva in Q4 (USD 18 mn).”

“Its EBITDA for Q2FY13 grew 2.3% QoQ to Rs. 3,377 mn, while the EBITDA margins fell 70 bps QoQ to 20.7%. The decline in margins can be attributed to 150 bps QoQ impact on wage increment, and 30 bps QoQ impact on HGS’ Revenue consolidation which has lower margins. However, the impact was partially offset by 90 bps QoQ improvement due to its cost optimization initiatives & rationalization of low margin projects. However, due to sharp increase in exchange loss (Rs.695 mn against Rs.242 mn in Q1), its PBT decreased 17.8% QoQ to Rs. 2,028 mn and its APAT declined 5.6% QoQ to Rs.1,777 mn. Its RPAT including share of Mahindra Satyam declined 12.5% QoQ to Rs.2,962 mn. The company gave 6% increment to offshore and 2% to onsite employees effective 1st Jul’12. We expect ~150-200 bps cut in EBITDA margins over the next two quarters due to full impact of HGS & Comviva consolidation and to stabilize thereafter at 18.5% level. During Q2FY13, the company closed two large deals - a five year contract of USD 100 mn TCV with Royal KPN which is a leading telecommunications & ICT provider, and a USD 75 mn TCV deal from a customer in UK. Despite the customers taking longer time in decision making, the deal pipeline looks decent as the company is chasing several large deals which are in the range of USD 50-150 mn TCV and are likely to be finalized in upcoming quarters.”

“With over 25% CAGR in last five year in Non-BT accounts, compensating for decline in BT account, Tech Mahindra expects its Non-BT accounts to deliver decent growth, while BT’s revenue is expected to muted in short-term due to its internal rationalization program and stabilize going forward. Moreover, the merger of Mahindra Satyam will further benefit the company by de-risking its business profile with more balanced industry, geography & client diversification, and business synergy by leveraging the expertise of both the companies. Considering its H1FY13 performance, the consolidation of HGS & Comviva financials and business outlook, we have upgraded our FY13E and FY14E estimates. We now expect Tech Mahindra to deliver 20.7% CAGR in Revenue and 15.1% CAGR in APAT during FY12-14E. At CMP of Rs.963, the stock is trading at 10.4x & 8.9x its FY13E & FY14E Earnings of Rs.92.8 & Rs.108 respectively. We have valued the company at 10x its FY14E EPS and maintain our ‘HOLD’ Rating with an increased target price of Rs.1080,” says Sushil Finance research report.  

Shares held by Mutual Funds/UTI  

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