Accumulate Tech Mahindra; target of Rs 900: Angel Broking

Angel Broking 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 has announced acquisition of 100% stake in Hutchison Global Services (HGS) for US$87.1mn, payable upfront. The company will fund this through debt and internal cash. The acquired company, HGS, had US$20mn of cash in its books, so on a net basis the cost of acquisitions for Tech Mahindra comes out to be US$67.1mn. As part of the deal, clients of HGS have committed to procure services worth US$845mn over a five-year period, and have agreed to HGS being their exclusive provider of certain agreed services in India. This deal will start adding to Tech Mahindra’s sales and earnings from the coming quarter which implies additional revenues of US$12mn in 2QFY2013 and US$40m per quarter from 3QFY2013 for Tech Mahindra. Tech Mahindra’s management indicated that this deal will be EPS accretive for the company.” “HGS offers back-office and customer-service support to the group's mobile firm in the UK and Ireland as well as its joint venture with Vodafone Group PLC in Australia. It has about 11,500 staff, employed across facilities in the western cities of Mumbai and Pune, and posted annual revenue of US$160mn spread across UK (~60%), Australia (35%) and Ireland (5%). At present,15% of the BPO operations are outbound. Also, the proportion of non-voice business is negligible. The operating margin of HGS is comparable to Tech Mahindra’s international BPO margins (mid teens). Also, there are no tax holidays available to HGS and the company is paying full tax on its profits.” “This deal will give a boost to Tech Mahindra’s revenue when the company is facing problems due to drop of sales from BT. But this deal will be operating margin dilutive for Tech Mahindra as BPO business has lower margins than other IT services. We have revised our USD revenue upwards for FY2013 and FY2014 by 6.5% and 14% respectively while the EBITDA margin forecast is reduced by 40bp and 56bp respectively. This deal will be EPS accretive for Tech Mahindra. The stock is currently trading at 8.1x FY2014E EPS. Taking into account the new share count of 23.08cr (post merger of Tech Mahindra and Mahindra Satyam), the consolidated EPS comes in at Rs85.8. We value Tech Mahindra at 10.5x FY2014E EPS and recommend an accumulate rating on the stock with a target price of Rs 900,” says Angel Broking 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

Read More