Accumulate Tech Mahindra; target of Rs 1063: Asit C. Mehta

Asit C. Mehta is bullish on Tech Mahindra and has recommended accumulate rating on the stock with a stock with a target of Rs 1063 in its November 6, 2012 research report.

“Tech Mahindra Ltd. (Tech Mahindra) reported its Q2FY13 results, which were below our estimates on the revenue front and in line with our estimates on the operating margin and PAT fronts. The company reported revenues of $299.2 mn (6.4% QoQ and 1% YoY growth) against our estimate of $315 mn. Revenues in Rupee terms stood at Rs16.3 bn (against our estimate of Rs17 bn), implying growth of 5.7% QoQ and 22% YoY . The operating margin came at 20.7% while the PAT was reported at Rs2,962 mn, both in-line with our estimates. The PAT also included Rs1,185 mn of profit share from associate concern i.e. Mahindra Satyam.”
“Revenues from British Telecom (BT) declined by 3% QoQ in the second successive quarter, internal cost optimization exercise in BT continues to weigh on Tech Mahindra’s revenues. Non-BT revenues including revenues from Hutchison Global Services (HGS) grew by 11% while excluding HGS, the non-BT revenues grew by 4% QoQ. The operating margin for the quarter declined by 70 bps to 20.7%. Wage hikes implemented during the quarter affected the operating margin by 150 bps. Hutchison Business, which has margins in the Mid-teens; lower than Tech Mahindra’s average affected margins by 30 bps. However, Tech Mahindra’s ongoing cost optimization exercise aided the operating margin to the extent of 110 bps, ultimately mitigating the decline to 70 bps for the quarter.”
“HGS and Comviva (in the coming quarters) acquisitions have managed to mitigate the adverse impact caused due to slower growth of BT and sluggish spend in Telcos at present. Gartner’s data suggests that recovery is not approaching very soon. In such a difficult situation, Tech Mahindra’s approach of optimizing costs, taking the inorganic route and judicious project execution will help improve revenue growth rates in FY13E and FY14E. We now value the company at 8x (as against 7x before) FY14E EPS. This is still below other mid-sized IT companies’ like KPIT and Hexaware, which are valued at 10x FY14E EPS. This relatively lower valuation is assigned considering slow growth in BT and sluggish Telecom IT spending environment that continues to be an overhang for Tech Mahindra. At Rs966, the company is trading at 8.2x the FY13E EPS of Rs118.3 and 7.3x FY14E EPS of Rs132.8, which is cheaper than the mid-size IT companies’ average valuation of 9 – 10. We value the company at 8x FY14E EPS and arrive at a target price of Rs1,063. We thus advise investors to accumulate the stock,” says Asit C. Mehta research report.  FIIs holding more than 30% in Indian cos  Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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