Tech Mahindra - 2QFY2013 Result Update - Angel Broking

For 2QFY2013, Tech Mahindra reported healthy set of results which were in-line with the expectations on the revenue front but the operational performance of the company exceeded our as well as the street's expectations. We believe the increased traction in non-BT accounts and consolidation of Hutchison Global Services (HGS, US$170mn annual revenue run rate) and Comviva (~US$70mn annual revenue run rate) will offset the decline in BT and will drive growth going forward. We maintain Accumulate rating on the stock.

Result highlights: For 2QFY2013, Tech Mahindra reported USD revenue of US$299mn, up 6.4% qoq, aided by acquisition of HGS (continued US$13mn). In INR terms, revenue came in at Rs.1,631cr, up 5.7% qoq. Despite having ~150bp qoq wage hike impact, the company's EBITDA margin declined by only 69bp qoq to 20.7%, aided by continuous cost optimization measures. The PAT came in at Rs.296cr, down 12.5%, impacted by ~Rs.69cr forex loss.

Outlook and valuation: The management indicated that the company remains confident of growth from the non-BT business with it continuing to see a robust deal pipeline across geographies. The company expects to close some of the managed services opportunities in 3QFY2013. 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 a CAGR of 10.1% and 14.1% in USD and INR revenue over FY2012-14E. We expect a 19.5% and 11.1% CAGR in EBITDA and PAT of Tech Mahindra over FY2012-14E. PAT of Tech Mahindra and Satyam for FY2014 are expected to be at Rs.830cr and Rs.1,225cr respectively. Taking the new share count of 23.08cr shares (post merger of Tech Mahindra and Mahindra Satyam) into account, the consolidated EPS comes in at Rs.89.0. We value Tech Mahindra at 12x FY2013E EPS of Rs.89.0 and maintain Accumulate rating on the stock with a target price of Rs.1,070.

Source : Equity Bulls

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