Tech Mahindra - Fundamental Call - Consortium

Tech Mahindra (TechM) the investor relation team issued an update on the impending merger and for their perspective on FY14E. Note, post the impending merger (likely conclusion before FY13E) the combined entity could like earn $2.8 billion in revenues with 90,000 employees and service 489 clients. Noticeably, the EBITDA margin profiles on the rise with both companies reporting margins of 20% in Q2FY13 (aptly aided by rupee tailwinds) while post-merger cost synergies, if any, and employee pyramid rationalization could likely help sustain the current margin profile. It is believeed a 36% PE multiple discount relative to HCL Tech (CY14E) is unjustified given the combined entity - sixth largest in size -could fill the gap between HCL Tech ($4.6 billion FY13E revenues) and a number of Indian vendors with revenues of $1 billion. Mahindra Satyam (MSat) has settled all its external legal disputes. However, income tax claims are pending and an adverse ruling in the AP High Court, which ordered a fresh scrutiny of MSat's accounts by an independent auditor (verdict likely by January 4), could lead to cash outflow and merger process delay, respectively. That said, it is believed the valuation at 8.8x is attractive given TechM could be a key beneficiary of MSat?s revival. Consequently, analysts have raised target price to Rs 1150.

Valuations modest for potential sixth largest IT company

Analysts expect US$ revenues to grow 6% QoQ in Q3 primarily led by acquisition while non-BT & BT could decline QoQ. The EBITDA margin could decline 120 bps QoQ led by modest revenue growth and acquisition costs. Initial client discussion suggests run-the-business budgets could be flat while change-the-business budgets could decline. Analysts have introduced FY15E estimates and expect revenues/EPS to grow 5.8%/11.2%, respectively. This translates to revenue/EPS CAGR of 12.5%/ 21%, respectively, during FY11-15E. Analysts believe valuations at 8.8x CY14E estimates are modest relative to the entity size and could get re-rated as consolidated financials evolve. Thus, analysts now value TechM at Rs1150 i.e. at 11.1x our CY14E EPS estimate of Rs104.1 Maintain our BUY rating.

Source : Equity Bulls

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