Accumulate Tech Mahindra; target of Rs 1800: Angel Broking

Angel Broking's report on Tech Mahindra

"Tech Mahindra, engineering services is a fast growing sector in the outsourcing space. According to the Nasscom, India is expected to deliver over a third of global engineering and research & development (ER&D) offshoring services by 2020. ER&D exports will reach US$35-40bn by 2020 from US$10bn in FY2012. In terms of synergies, the Management said that Tech M will gain access to some key auto clients globally and have a strengthened engineering services offering while MES will get greater global reach through Tech M. The Management indicated that there is no client overlap between Tech M and MES other than M&M. M&M owns 80 percent of MES with the balance 20 percent held by the employee trust."

"At the CMP, this transaction values MES at Rs 723cr and enterprise value of Rs 607cr (netting MES’s net cash of Rs 117cr). The valuation of the deal appears a tad higher at ~2.3x EV/Sales and ~15x P/E based on 1HFY2014 run rate as compared to Infotech Enterprises which trades at ~12x P/E and ~1.2x EV/Sales. The acquisition, for Tech M, is earnings neutral for FY2014E, in our view. Management believes that growth of MES could improve in FY2014E, backed by margin expansion. Further, the Management highlighted strong capabilities, growth potential and superior margins of MES as factors backing the premium valuations paid for the acquisition."

Valuation: "We currently maintain our estimates of Tech M as the acquired company has a very low revenue base as compared to Tech M’s overall turnover. MES’s current revenue base is ~1.2 percent of Tech M’s overall revenues. We maintain our accumulate rating on the stock with a target price of Rs 1,800," says Angel Broking research report.

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