Tech Mahindra - 1QFY2013 Result Update - Angel Broking

For 1QFY2013, Tech Mahindra reported modest results which were in-line with the expectations on the revenue as well as the bottom-line front but the operational performance of the company exceeded our as well as street expectations. The management sounded confident of the deal pipeline in the non-British Telecom (BT) business while revenue from BT is expected to remain flat. We recommend an Accumulate rating on the stock.

Result highlights: For 1QFY2013, Tech Mahindra reported USD revenue of US$281.3mn, almost flat qoq, driven by ~1% qoq volume growth. USD revenue from the non-BT business increased by 1.5% qoq to US$180mn. In INR terms, revenue came in at Rs.1,543cr, up 8.8% qoq. The company's EBITDA margin increased substantially by 454bp qoq to 21.4%, which was a positive surprise. The expansion in the EBITDA margin was aided by: 1) favorable currency: +300bp qoq impact and 2) cost optimization measures on the selling, general and administrative (SGA) expenses front.

Outlook and valuation: The management indicated that the company remains confident of growth from the non-BT business with the company continuing to see a robust deal pipeline across geographies and on plans of closing some of the managed services opportunities in 2QFY2013 in Europe. Also, the deal pipeline looks healthy in the US and emerging markets. But the management witnessed that the decision making cycle has become elongated and decision making continues to be extremely slow as customers scrutinize every aspect of expenditure. 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. Thus, we expect a 4% CAGR in USD revenue over FY2012-14E. The PAT of Tech Mahindra and Satyam for FY2014 are expected to be at Rs.802cr and Rs.1,136cr respectively. Taking into account the new share count of 23.08cr (post merger of Tech Mahindra and Mahindra Satyam), the consolidated EPS comes in at Rs.84.0. We value Tech Mahindra at 10x FY2013E EPS of Rs.84.0 and recommend an Accumulate rating on the stock with a target price of Rs.840.

Source : Equity Bulls

Keywords