Buy Tech Mahindra; target of Rs 2350: PLilladher

Prabhudas Lilladher`s research report on Tech Mahindra

“TECHM’s Q1FY15 results were in-line with expectation. Revenue grew by 1.3% QoQ to Rs51,215m (PLe: Rs50,907m, Cons.: Rs50,783m) and 3.7% QoQ in USD terms to US$855m (PLe: US$852m, Cons.: $850m). EBITDA margins eroded by 306bps QoQ to 18.1% (PLe: 19.9%, Cons: 19.8%) due to lower utilization (50bps), currency appreciation (50bps), visa expense (100bps), and large deal transition drag (80bps). EPS grew by 1.7% QoQ to Rs26.15 (PLe: Rs29.03, Cons: Rs29.75) due to higher other income of Rs893m (Q4FY14: - Rs867m).” “The company continues to see margin headwinds due to large deal transition for second quarter in succession. We expect the growth rate to improve as large Network Services deal starts ramping-up. Moreover, the deal closure continues to be healthy. We expect revenue momentum to accelerate during FY15 as BASF and MES (inorganic) contribution pour-in. We expect TechM to grow ahead of NASSCOM guidance. The company will have near-term margin tailwinds from non-recurring visa cost, utilization improvement and deal ramp-up. Moreover, the management is working on improving employee pyramid (28% at 0-3yrs experience) to industry average of ~40%. We expect both tactical and strategic margin lever to push margin higher from Q1FY15 level. We are factoring in steady margin improvement during FY15. Cash flow from Operation to EBITDA ratio improved to 68% from 59% in the previous quarter despite worsening DSO to 102 days (Q4FY14: 96 days). We expect further improvement in free cash flow during CY14-15.” “We expect high-teen revenue growth in FY15 with steady improvement in margin at constant currency during FY15. We retain ‘BUY’ rating, with a revised TP of Rs2,350, 14x FY16e earnings estimate,” says Prabhudas Lilladher research report.

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