Buy Tech Mahindra; target of Rs 1012: Ventura

Ventura is bullish on Tech Mahindra and has recommended buy rating on the stock with a target of Rs 1012 in its August 27, 2012 research report.

“Tech Mahindra is witnessing growth in its non BT business and is eyeing large opportunities in Europe. For Q1FY13, where revenues from BT stood at $101.3 mn (-12.6% yoy, -2.8% qoq), revenues from the non BT business posted a growth of 1.5% qoq to $180 mn (+3.5% yoy). The merging entity Mahindra Satyam (MSat) has also come a long way and got its act right. Not only has MSat retained most of its clientele but also has added new clients to its portfolio."

"MSat clocked a 6.9% yoy growth in revenues to $342 mn (+1.5% qoq) in Q1FY13. Furthermore, the attrition rates have also dipped to the lowest (lowest in Q1FY13 in the past 3 years) suggesting that the operations have stabilized and the worst is behind us. Also the cash on books of Rs3,058 crore being sufficient to address the tax liabilities (Rs2,500 crore) and the management having already provided for against claims raised by the erstwhile promoters, we believe that all the negatives are already priced in.”

“The merger between the two companies will lead to a reduced dependence on BT resulting in a balanced mix of revenues from different verticals leading to lowered concerns on portfolio concentration (BT business). We expect revenues of the merged entity to grow at a CAGR of 11.3% yoy to Rs14,733 crore from Rs 11,885.3 crore in FY12. Operating profits and earnings are expected to grow at a CAGR of 17.1% yoy and 4.2% yoy to Rs 2,647.7 crore and Rs1990.2 crore respectively.”

“The merged entity will be ranked 5th in terms of revenues and headcount after HCL Tech with a wide suit of offerings, de-risked business profile and well diversified geographical exposure. At a CMP of Rs876, the merged entity is trading at 10.6x and 10.2x FY13 and FY14 earnings estimates which is at a significant discount to peers. Given the improved business prospects, streamlined operations and adequate provisioning against contingent liabilities we believe that the discount to peers is unjustified. We upgrade our target to Rs1012 (13x FY14 P/E) for the standalone entity TechM representing a potential upside of 15.5% over the next one year. Also, we value MSat at Rs119 representing a potential upside of 20% from the current CMP of Rs99,” says Ventura research report.

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