Accumulate Tech Mahindra; target of Rs 2020: Dolat Capital

Dolat Capital's report on Tech Mahindra

"Tech Mahindra reported a 4.4 percent QQ revenue growth driven by strong growth in non-BT telecom clients (QQ growth of 6 percent+). We remain positive on the stock in view of its sustained traction (4.2 percent CQGR over last 7 quarter) and improved profitability (120bps during the same period). We expect a Revenue/EPS CAGR of 21/28 percent over FY13-16E with an Accumulate rating on the stock with a target price of ‘ 2020, valued at 12x of FY16E earnings."

"The Company added 29 new clients during the quarter (130 on LTM basis) across geography and service line as it see better demand for connected solutions especially on the enterprise side of the business. It is now focusing more on the client mining aspects given the traction for Mobility/VAS/Networking services."

"The company has clocked about 17 percent growth in revenues in the Telecom segment for 9MFY14 (6 percent QoQ in non BT Telecom) which hints of possible recovery in the long underperforming Telecom vertical. We believe that TechM would be biggest beneficiary of demand recovery in the vertical and may see further upgrades if it happens."

"OPM declined by 40bps in the quarter largely on account of 1.6 percent INR appreciation during the quarter.  The company has announced wage hikes of about 2.5 percent/7 percent for onsite/offshore employees effective Jan’14 and thus would impact about 200bps on operating margin.  The hike is applicable only for around 80 percent of employee base (excludes employees from recently acquired entities and new joiners)."

Valuations: "The commentary has turned confident furthermore as it witness demand traction in Telecom along with sustained momentum in Enterprise segment. We believe sustained improvement in the Telecom business may lead to further growth/earnings upgrade in FY15-16E.  We expect a Revenue/EPS CAGR of 21/27 percent over FY13-16E with an Accumulate rating on the stock with a target price of Rs 2020, valued at 12x of FY16E earnings (inline with current levels, 10 percent discount to HCLT)," says Dolat Capital research report.

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