Accumulate Tech Mahindra; target of Rs 900: PLilladher

Prabhudas Lilladher is bullish on Tech Mahindra and has recommended accumulate rating on the stock with a target price of Rs 900 in its September 5, 2012 research report.

“Tech Mahindra announced acquisition of Hutchison Global Services (HGS) for US$87.1m which is payable upfront; this move that will help the company expand its IT and BPO businesses. The acquired company has US$20m net cash on the asset. The deal assures US$845m revenue spread over five years. The deal will be financed with the combination of internal accrual and debt. Hutchison BPO Launched in 2003, 3 Global Services (3GS) was a whollyowned subsidiary of the Hutchison Whampoa group. As a centre, which started off with a 500-seated facility in 2003, HGS provides customer lifecycle operations to clients in UK, Ireland and Australia and has an associate base of over 11.5k employees. HGS operates out of Mumbai and Pune. Despite being a captive unit of Hutchison, 3GS, however, never catered to their Indian telecom operations, then known as Hutch-Essar (Vodafone).” “Our analysis indicates billing rate for the acquisition to be as low as ~$7.2/hr, one of the lowest among the peers (Exhibit 3) for the acquired business although the assured business gives revenue visibility. According to the management, EBITDA margin for the acquired BPO business is in mid‐teens (TechM Q1FY13: 21.4%). The deal is EPS accretive (Exhibit: 1, 2). TechM may use Mahindra Satyam’s cash for debt-financing but is likely to have transaction at arm’s length. Tech Mahindra bagged an IT services deal from Hutchison recently in UK. The deal is in the early phase of transition, which is likely to take three months. The management is confident of cross-selling other services to Hutchison.” "We see an opportunity to cross sell and cost take-out from the current operations. The acquisition will dampen EBITDA margin for overall entity, but the overall deal remains EPS accretive. The merged Tech Mahindra-Satyam entity would be the 5th largest IT Company in India. We revise our target multiple for the company to 10x (from 9x) in-line with other non-top 4 companies. Reiterate “accumulate” with a revised target price of Rs 900 (from 820), 10x FY13 earnings estimate,” says Prabhudas Lilladher research report. Institutional holding more than 40% 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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