Accumulate Tech Mahindra; target of Rs 2662: KRChoksey

KRChoksey`s research report on Tech Mahindra“Tech Mahindra, continues to surprises us positively at revenue front i.e. revenue grew by 5.2% QoQ (in USD terms) versus our projection of 3.4% growth. Entire incremental revenue of $45 mn was contributed by top 5 clients which registered growth of 14% YoY to 40% in Q2 FY15. We believe, the company registered major ramp-up in case of AT&T, as revenue from telecom increased by ~9% QoQ (in USD terms) to 52% and contribution from US increased by 200 bps QoQ to 49% of total revenue in Q2 FY15. However, Enterprise business registered mediocre growth of 1.6% QoQ led by pressure in Technology, Media and Entertainment segment, which declined by ~9% QoQ in USD terms. EBITDA margin improved by 187 bps QoQ to 20% as against our expectation of 19.6% in Q3 FY14. Improvement in margins was led by increase in utilization rate (excluding trainees) by 100 bps QoQ to 76%, one time visa cost in Q1 FY15, dip in other operating expenses and INR depreciation against the US Dollar by 2% QoQ. Higher than expected EBITDA margins was led by higher than expected INR realization and dip in other operating expenses by 7% QoQ supported by cost rationalization measures undertaken by the company in past couple of quarters.""We expect, the company to clock revenue growth of 18% YoY (in USD terms) in FY15E as compare to NASSCOM’s expectation of 13% to 15% growth for Indian IT industry. Our confidence stems from strong traction in both telecom (led by demand for network management, digital solutions and analytics) and enterprise business (supported by end-to-end solutions in Manufacturing). Considering better than expected revenue growth and improvement in EBITDA margins in Q2 FY15, we are increasing our revenue estimates for FY15E and FY16E by 1.4% and 2.1%, respectively and raising our EBITDA margin assumptions by 10 bps and 30 bps for FY15E and FY16E, respectively. Moreover, we believe, they will be upgrade in consensus earnings estimates led by positive surprise in Q2 FY15E. Taking the same into account, we recommend “ACCUMULATE” on the stock with a price target of Rs. 2,662 by assigning multiple of 16 times (i.e. 20% discount to TCS target P/E multiple) to its FY16E EPS (excl treasury stocks) of Rs. 166.4,” says KRChoksey research report. 

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