Hold Tech Mahindra; target of Rs 1026: Sushil Finance

Sushil Finance has recommended hold rating on Tech Mahindra with a target of Rs 1026 in its September 21, 2012 research report. According to the research firm, Tech Mahindra expects its Non-BT accounts to deliver decent growth, while BT’s revenue is expected to stabilize at current level going forward.

“Tech Mahindra is a leading provider of solutions and services to the telecommunications industry with a majority stake owned by Mahindra Group, in partnership with British Telecommunications plc. (BT) Tech Mahindra serves telecom service providers, equipment manufacturers, software vendors and systems integrators worldwide and its proven delivery models, distinctive IT skills and decades of domain expertise enable clients to maximize returns on their IT investment.    With its global footprint and presence in more than 31 countries, Tech Mahindra is the largest IT solution provider to global telecommunication companies. As per the latest Voice & Data magazine’s Annual Survey, it leads the Rs. 234.43 bn Indian telecom software services market in FY 12 with 20.9 % market share.”

“During Q3FY10, BT restructured its long term contracts (Barcelona and Strada) and Tech Mahindra received restructuring charges of GBP 126 mn (~Rs.9.7 bn). The restructuring happened at lower rates with volume commitments over the period of contracts. Tech Mahindra recognized Rs.1.5 bn Revenue in Q3FY10 and balance was supposed to be amortized over the period at the run rate of Rs. 0.5 bn/quarter. Subsequently, BT also restructured its contract ANDES. During FY07-12, the BT Revenue in USD term grew at ~1% CAGR due to their restructuring exercise and cost cutting measures, while Non-BT accounts delivered 25.5% CAGR, driven by strong contribution from telecom majors such as AT&T, Motorola, MTN, Bharti, Alcatel Lucent, and Vodafone etc. Going forward, Tech Mahindra expects its BT contribution to remain flat, while Non BT accounts to grow at decent rate.    The Recent acquisition of Hutchison Global Services (HGS) for USD 87.1 mn will enhance its expertise in the customer management space and enable Tech Mahindra to leverage the acquired capabilities for expanding its existing services to other parts of the Hutchison group as well as other customers and verticals."

“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 stabilize at current level 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. We expect Tech Mahindra to deliver 17.1% CAGR in Revenue and 12.1% CAGR in APAT during FY12-14E. At CMP of Rs. 898, it is trading at 10.1x & 8.8x its FY13E & FY14E Earnings respectively. We have valued the company at 10x its FY14E EPS and change our Rating from buy to hold with a target price of Rs. 1026,” says Sushil Finance research report.

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