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February 9, 2012
Tech Mahindra
Performance Highlights
(` cr) Net revenue EBITDA EBITDA margin (%) Adj. PAT* 3QFY12 1,445 234 16.2 276 2QFY12 1,333 204 15.3 290 % chg (qoq) 8.4 14.8 90bp (5.0) 3QFY11 1,211 250 20.6 257 % chg (yoy) 19.3 (6.2) (441)bp 7.4
ACCUMULATE
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code IT 8,593 1.0 798/524 41,643 10 17,831 5,412 TEML.BO TECHM.IN
`659 `693
12 months
For 3QFY2012, Tech Mahindra reported subdued performance with revenue as well as profit coming in below ours as well as streets expectations. BT business was a major growth dampener, USD revenue of which declined by 7.8% qoq. Growth came from non-BT business yet again, which grew by 0.6% qoq. BT has started retendering its work; this poses risk to Tech Mahindras revenue run rate. However, due to the companys stake in Mahindra Satyam, we maintain our Accumulate rating on the stock. Result highlights: For 3QFY2012, Tech Mahindra reported USD revenue of US$288.7mn, down 2.5% qoq due to a 0.5% qoq decline in volume and ~2.0% qoq negative cross-currency impact. In INR terms, revenue came in at `1,445cr, up 8.4% qoq, largely aided by qoq INR depreciation. EBITDA margin of the company improved by 90bp qoq to 16.2% on the back of INR depreciation. Outlook and valuation: We expect the non-BT business to post a CQGR of 2.4% over 3QFY2012-4QFY2013, with BTs quarterly revenue expected to be flat from here. However, there is a caveat that BTs revenue may see a downside if the company loses out its market share in the retendering process initiated by BT. In fact, even if the company manages to hold the share or increase it, it can be margin dilutive as the client has initiated this retendering process as part of its cost-cutting drive with lower pricing expectation. Thus, we expect a 7.6% CAGR in USD revenue over FY2011-13E. The companys core EPS is expected to post a negative CAGR over FY2011-13E. The only potential upside is due to the companys stake in Mahindra Satyam, which is improving its overall profitability. We continue to value the company at 55% discount to Infosys target PE i.e., at 8x the companys consolidated EPS of `86.4 and maintain our Accumulate rating on the stock with a target price of `693.
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 70.9 15.2 4.9 9.0
3m
1yr
Ankita Somani
+022 3935 7800 Ext: 6819 ankita.somani@angelbroking.com
Source: Company, Angel Research; Note: *Excludes share of profits from Mahindra Satyam
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12
187 7.3
188 8
(%)
0.6 3QFY12
Management indicated that BT business may continue to decline in the next few quarters, as BT is retendering its contracts. This may lead to Tech Mahindra losing its share in BT contracts, as clearly the client is looking out for a lower pricing opportunity as part of its cost-cutting drive. So, even if the company manages to hold or gain its share, it is expected to be operating margin dilutive.
4 1.5 2 0
(%)
116 114
110
105
(10)
The companys revenue from telecom service providers (TSPs) (~78.6% to revenue) and telecom equipment manufacturers (TEMs) (~7.3% to revenue) grew by 4.5% and 31.5% qoq to `1,135cr and `106cr, respectively. The companys top 2-5 clients drove its growth in 3QFY2012, by registering whopping 0.6% qoq USD revenue growth. Revenue from the companys top 6-10 clients declined by 2.5% qoq during the quarter.
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13.6 9.3 7.3 3.0 1.7 3.6 1.5 4.1 4.1 0.6 (2.5) (5.5) 1QFY12 2QFY12 Next 5 accounts (7.8) 3QFY12
(3.5)
4QFY11
Next 4 accounts
78 76
224
72 70
BPO professionals
Utilisation (%)
Margin improves
In 3QFY2012, Tech Mahindras EBITDA and EBIT margin increased by 90bp and 201bp qoq 16.2% and 13.5%, respectively, because of depreciating INR, which absorbed the negative impact of onsite wage hike given.
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(%)
74
(%)
25 20 15 10
20.6
20.5
17.8
17.5
11.5 2QFY12
3QFY11
EBIT margin
Client pyramid
Tech Mahindras client pyramid witnessed slight improvement with one of its clients being added to the US$20mn-25mn bracket from lower revenue bracket. Also, US$1mn-2mn revenue bracket witnessed addition of three new clients. The active client base of the company increased to 130 in 3QFY2012 from 128 in 2QFY2012.
February 9, 2012
PAT is expected to be supported by 1) the deep in-the-money hedges of 305mn and US$540mn with participation rates at 83 INR/GBP and 50 INR/USD, boosting forex gains for the company; and 2) declining interest expense due to quick repayments possible from Mahindra Satyams strong earnings. Thus, the companys core EPS is expected to have a negative CAGR over FY2011-13E. The only potential upside is due to the companys stake in Mahindra Satyam, which is improving its overall profitability. Since, the companys core earnings are subdued and the huge contribution (~33%) to its consolidated earnings is due to Mahindra Satyams profitability, we continue to value the company at 55% discount to Infosys target PE i.e., at 8x the companys consolidated EPS of `86.4 and maintain our Accumulate rating on the stock with a target price of `693.
(`)
1,000 700 400 100 Jan-08 Jul-08 Price Jan-09 23 Jul-09 Jan-10 18 Jul-10 13 Jan-11 8 Jul-11 Jan-12 4
Source: Company, Angel Research. Note: P/E includes share of profits from Mahindra Satyam 2QFY2011 onwards.
February 9, 2012
Source: Company, Angel Research. Note: ^Valued on SOTP basis,* EPS CAGR includes earnings from Mahindra Satyam
February 9, 2012
FY2009 FY2010 4,465 2,638 1,827 40.9 612 13.7 1,215 27.2 110 2.5 1,106 24.8 3 (38) 1,065 118 11.1 947 67 1,014 947 77.4 4,625 2,871 1,754 37.9 622 13.4 1,133 24.5 134 2.9 999 21.6 218 75 856 144 16.8 712 (9) 3 700 709 53.6
FY2011 5,140 3,403 1,737 33.8 734 14.3 1,003 19.5 144 2.8 860 16.7 100 117 877 132 15.0 746 44 (143) 4 643 786 49.3
FY2012E 5,520 3,702 1,818 32.9 887 16.1 931 16.9 165 3.0 766 13.9 115 164 814 172 21.1 642 423 5 1,061 1,061 84.2
FY2013E 6,153 4,094 2,059 33.5 1,009 16.4 1,050 17.1 175 2.8 875 14.2 54 111 932 214 23.0 718 422 1,140 1,140 86.4
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FY2009 FY2010 FY2011 FY2012E FY2013E 1,170 110 1,280 (38) 1,242 (118) 1,124 194 65 (43) 5 222 1,346 (162) (371) (14) (547) (30) 3 0 (274) (57) (358) 441 98 538 780 134 (9) 906 73 978 (144) 834 (140) (377) (8) (14) (539) 295 (407) (2,580) (8) (2,995) 2,135 5 3 288 (50) 2,381 (320) 538 219 760 144 (98) 805 114 919 (132) 788 (205) 1 (160) 49 (45) (358) 429 54 107 (36) 125 (912) 584 (0) 2 (117) (61) (504) 49 219 267 651 165 425 1,241 159 1,400 (172) 1,228 22 (51) 18 35 24 1,252 (175) 36 (11) (149) (316) (584) (74) (974) 129 267 395 821 175 422 1,418 111 1,530 (214) 1,315 (132) (132) 45 (39) (258) 1,057 (176) 2 (3) (177) (500) (80) (580) 300 395 696
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10
FY2009 8.5 7.6 4.4 0.6 1.8 6.6 12.4 77.4 86.2 3.7 149.0 0.9 1.0 0.2 6.8 0.3 48.7 56.6 87.6 48.7 6.8 82 56
FY2010 12.3 10.3 3.0 0.5 2.3 9.3 11.4 53.6 64.0 3.3 221.4 0.8 0.9 0.2 5.0 0.3 24.7 19.8 22.2 24.6 5.0 77 49
FY2011 13.4 10.9 2.6 0.6 1.9 9.5 13.1 49.3 60.3 4.0 257.0 0.9 1.0 0.2 7.1 0.2 22.3 16.6 18.0 23.5 7.1 81 43
FY2012E 7.8 7.1 2.0 0.6 1.6 9.8 12.4 84.2 93.0 4.0 328.9 1.3 1.1 0.1 7.5 0.2 24.5 14.6 16.2 24.5 7.5 81 42
FY2013E 7.6 6.6 1.6 0.6 1.3 7.9 11.3 86.4 99.7 4.0 409.2 1.2 1.1 0.1 8.3 0.1 21.1 15.0 17.6 21.1 8.3 81 41
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered
Tech Mahindra No No No No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
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