Buy Tech Mahindra; target of Rs 1215: Motilal Oswal

Motilal Oswal`s research report on Tech Mahindra

“Tech Mahindra's (TECHM) 4QFY13 revenue grew 7.2 percent QoQ to USD353.2m, above our estimate of USD336m. EBITDA margin of 19.9 percent (-110bp QoQ) was a key positive surprise; we had estimated 19.2 percent. PAT before share of Satyam's profits was INR1.96b, below our estimate of INR2b, due to forex loss of INR373m in other income and higher tax rate (26.6 percent v/s 24 percent). Revenue from BT declined to USD88m from USD96m in 3QFY13 due to GBP depreciation; in constant currency terms, revenue from BT was almost flat QoQ. Non-BT revenue grew 13.3 percent QoQ; 89 percent of incremental revenue came from the Comviva-HGS acquisition.” “The positive surprise on EBITDA margin was largely on account of headcount rationalization. Overall headcount declined by 1,561 employees. BPO headcount declined by 3,451 employees. Revenue from BT is stabilizing, with flattish growth in constant currency terms, and is expected to remain soft with the on ongoing consolidation at the client's end. However, ramp-ups in deal wins and growth in acquisitions should offset the impact and facilitate revenue growth. Revenue from BPO has increased from 5.9 percent in 1QFY11 to 17.8 percent in 4QFY13. During this period, EBITDA margin has expanded by 117bp to 19.9 percent. TECHM has been avoiding attrition backfilling for the last two quarters and using just-in-time hiring to maintain margins. We have upgraded our FY14 EBITDA estimate by 16bp to account for higher productivity gains in 4QFY13. This has caused 0.9 percent/0.5 percent upward revision in our EPS estimates for FY14/FY15.” “The stock trades at 9.1x FY14E and 7.9x FY15E EPS. We value TECHM at 25 percent discount to our target multiple for HCLT due to: [1] relatively smaller scale, [2] skew of revenue towards the Telecom vertical, and [3] increasing proportion of BPO revenue. Maintain Buy. Our target price for TECHM is INR1,215, which discounts FY15E EPS by 10.5x,” says Motilal Oswal research report.      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.

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