Buy Tech Mahindra; target of Rs 1180: Dolat Capital

Dolat Capital is bullish on Tech Mahindra and has recommended buy rating on the stock with a target of Rs 1180 in its September 17, 2012 research report.

“Tech Mahindra announces acquisition of 51% stake in Mobile platform and VAS Solution company for Rs 2600mn widening its presence in the telecom space and offerings in the booming VAS, MCommerce segment. The positive news flow continues to reinforces our view of re-rating of the stock considering its strong business aggression organically (Dutch Telecom deal) and inorganically (Comviva and HGS Deal) to boost the revenue growth traction. We maintain Tech Mahindra as our top pick with a revised TP of Rs 1180 (earlier Rs 1065) valued at 10x (earlier 9x) of its FY14E earnings Deal details: Tech Mahindra bought 51% stake in Comviva for an upfront payment of Rs 1250mn and intent to buy another 29% over next 5 years for another investment of Rs 1350mn based on certain revenue performance driven earn outs; valuing the company at Rs 2450mn.”

“The company has revenues of USD 70mn and OPM of mid teens in CY11. Its Top 10 clients contribute 85% of revenues with cash on the books of Rs 320mn. The existing investors-Bharti, Sequoia, Westbridge and Cisco would continue to hold the residual 20% stake in the company. The company has several products and platforms such as Mobile apps, messaging platform, mobile money, mcommerce and loyalty management solutions for Telcos (OEM and TSPs). VAS contributes 30% of revenues, rest is platform based. The revenue model is part lumpy but has several emerging revenue streams to offer sustained growth trend. Revenue CAGR of 15-18% over CY08-11.”

“Comviva has over 130 customers largely TSPs, OEMs and VAS players spread over 90 countries wherein TechM could do lots of cross/ up sell its offerings from its existing stable. Lots of clients are overlap but offers significant opportunity to mine into. The acquisition will boost the revenues by 3.5%/6.5% in FY13/14E and is EPS accretive. The profitability of the acquired entity is almost inline with the company. We maintain our buy rating with a TP of Rs 1180 per share, valued at 10x of FY14E earnings,” says Dolat Capital research report.

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