Buy Tech Mahindra; target of Rs 530: Centrum

Tech M’s results were a mixed bag, with revenue beat negated by EBIDTA margins. Higher depreciation and tax rate weighed on PAT which was 13% below our estimates. We note that management has already guided that 2QFY17 margins were impacted by one-off restructuring costs. We expect Tech M to deliver 7.2% USD revenue growth for FY17E .Our USD revenue growth assumption implies organic growth of 4% and rest owing to full impact of acquisitions (Pininfarina, Target and Bio-agency). We have already trimmed our EBIDTA margin assumptions post 2QFY17E preview communication. Post the results, we now marginally reset margins to 15.3%/16.2% for FY17/18 (vs 15.4%/16.1% modelled earlier). We cut our EPS estimates by 5%/2% for FY17/18E. Valuations remain attractive (10.7x FY18E EPS) and risk return remains favourable. Our TP is trimmed by 4% to Rs 530/sh (13.5x FY18E EPS). Maintain BUY.

We model USD revenue growth of 7.2%/10.2% for FY17/18E. We note that Tech M’s organic growth would be 4% for FY17E which is in the midrange of peers. Organic USD revenue growth of peers TCS/Infosys/Wipro/HCL Tech would be 7.1/8.4/1.5/8.8% for FY17E. We believe valuations at 10.7 x FY18E remain favourable. Scope for higher margin improvement in FY18 led by completion of restructuring in LCC could be an additional catalyst. Retain BUY.