Tech Mahindra - CMP Rs.967 - 2012 Diwali Pick - Aditya Birla Money

Mahindra Satyam (MS) & Tech Mahindra (TM) both have shown tremendous resilience in overcoming their respective headwinds, especially in the last 5-6 quarters.

MS has grown dollar revenues by ~2.5% on QoQ basis, by winning back lost clients, adding new logos and improving the operating margin to above 21% from mere mid-single digit (~6%) margin 8 quarters back.

TM has grown dollar revenues by ~1% on QoQ basis, despite BT de-growth by 3.2% QoQ, which was compensated by the robust non-BT growth of ~3% QoQ growth. This helped them to reduce BT:Non BT ratio to 33:67 from 40:60 in Q1FY12. The merger would de-risk TM's client, vertical concentration risk and provide tremendous cross-selling opportunities. We believe the combined entity is likely to become a stronger contender in emerging areas such as Mobility, Network, Cloud & Security solutions with parents' Telecom (TM) & Manufacturing (M&M) expertise.

Despite the run-up (~50% post Q412 results), the combined entity is still trading at ~10x on its FY14E (Bloomberg consensus), which we believe is relatively cheap (~15% discount) to its nearest competitor HCL Tech We believe the combined entity (~$2 ( Tech. ( $2.5 bn revenues) would bring size, technical expertise (Telecom & Manufacturing) and strong brand into it. We maintain our positive stance for its consistent performance and strong investments in the next wave of growth areas and geographies.

Source : Equity Bulls

Keywords