Tech Mahindra - No green shoots here - Standard Chartered

- TechM's revenue trajectory remained weak – normalised revenue dropped 2.2% qoq, sharper than our estimates.

- BT business declined 8%, as expected; slower traction in non-BT revenues disappointed.

- EBITDA margin expansion (+90bp) was in-line; higher onsite and lower realization minimized INR uplift.

- We see near-term core EPS under stress from an extended BT re-bid process + subdued near-term outlook for non-BT business.

- While valuations (at 9x FY13F EPS) are undemanding, we see no immediate-term triggers. In-Line maintained.

3Q12 results: revenues fall was sharp. Consol. revenue (ex-BT contract restructuring fee) declined 2.2% qoq to US$279m (SCSI est. US$294m) weighed by c170bp cross-currency and realisation hit; volume dropped marginally (-0.5% qoq). BT revenues fell 3% to £65m, net of rate renegotiations while non-BT revenues grew a slow 0.6%, mainly due to cross currency.

However, margin held up. Normalised EBITDA margin was up 120bp to 13.2% (vs. our 12.9% est.) due to lower SG&A costs (-9% qoq in US$ terms). Gross margin was flat as realization drop in BT + higher onsite (from transition in Vodafone Australia deal) negated the uplift from weaker INR + increased utilization + pyramid rationalization. Higher FX losses (Rs101m versus our Rs70m gain est.) kept PAT (ex-Satyam) at Rs943m (+6.5% qoq), below estimates, despite Rs141m one-time tax refund.

Near-term outlook remains weak. We expect BT business will likely remain on a downtrend as renegotiated rate-card kicks-in and extension of cuts to other parts of BT. This should affect both revenue and margin outlook near term. Thus, our sharp FY12 core EPS cut (-19%); a 5% INR reset has pushed FY13/FY14E core EPS marginally (0.3%/2.1%).

Maintain In-Line. We remain cautious on near-term organic business outlook; our revised PT of Rs590 (Rs570 earlier) is mainly from period roll-forward/INR reset and values TechM at 9x FY13E cons. EPS. We expect stock to trace back part of its 13% YTD upmove on weak 3Q12 results and subdued management commentary even as inexpensive valuation and stable outlook for Satyam provide downside support. We retain our bias for an organic play to Satyam's turnaround story.

Source : Equity Bulls

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