Tech Mahindra - 4QFY2012 Result Update - Angel Broking

For 4QFY2012, Tech Mahindra reported subdued performance on the revenue front, however operationally the company did well. Non-BT business, surprisingly, was a major growth dampener, USD revenue of non-BT business declined by 5.5% qoq. Growth came from BT business due to some one-time discretionary spend done by BT. BT has started retendering its work; this poses risk to Tech Mahindra's revenue run rate. However, due to the company's stake in Mahindra Satyam, we maintain our Buy rating on the stock.

Result highlights: For 4QFY2012, Tech Mahindra reported USD revenue of US$281.6mn, down 2.5% qoq, due to a decline in revenue from two telecom clients from India, as these clients are ramping down their business after cancellation of 2G licenses. The company has in fact made a provision of Rs.68cr in lieu of the uncovered dues from these parties. The company's EBITDA margin for the quarter increased by 63bp qoq to 16.8% because of increased utilization level and a decrease in employee base, which led to savings in employee cost.

Outlook and valuation: Management sounded optimistic regarding non-BT business and is currently chasing 6-7 managed services deal. We expect the non-BT business to post a CQGR of 2.8% over 1QFY2013-4QFY2014, with BT's quarterly revenue expected to be flat from here. However, there is a caveat that BT's revenue may see a downside if the company loses out its market share in the retendering process initiated by BT. Thus, we expect a 5.6% CAGR in USD revenue over FY2012-14E. The company's core EPS is expected to merely post a 4% CAGR over FY2012-14E. The only potential upside is due to the company's stake in Mahindra Satyam, which is improving its overall profitability. PAT of Tech Mahindra and Satyam for FY2014 is expected to be at Rs.658cr and Rs.936cr, respectively. Taking the new share count of 23.08cr (post merger) into account, the consolidated EPS comes in at Rs.69.1. We value Tech Mahindra at 10.5x FY2013E EPS of Rs.69.1 and maintain Buy on the stock with a target price of Rs.725.

Source : Equity Bulls

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