Tech Mahindra - Healthy revenue beat; valuations cheap - BUY - Religare

TECHM reported a better-than-expected 4Q as US$ revenues grew 7.2% QoQ led by acquisitions. Organic revenues were up 3% QoQ in CC as BT was flat in GBP terms and non-BT portfolio continued to do well. Margins dipped 140bps QoQ to 16.8%, a shade better than RCMLe of 16.5%. While the outlook for BT is soft, the remaining portfolio continues to see growth. We upgrade our pro-forma EPS by 3% to reflect the beat. Valuations at 8x remain cheap, and merger approval remains a key near-term catalyst. BUY.

Healthy non-BT growth, BT flat: Revenues came in at US$ 353mn, up 7% QoQ. In organic terms, revenues were up 3% QoQ CC. Flat sequential revenues (GBP terms) at BT were a surprise against an expectation of a decline. Notably, the BT revenue mix has now come down to 25%. PAT, adjusted for Satyam's one-time, came in at Rs 3.2bn (up 6% YoY), in line with our estimates.

Revenue drives beat, margins down: EBIT margins slipped 140bps QoQ to 16.8% as against our expectations of a 170bps decline; however a revenue-led beat was a positive. The management indicated that although sales cycles are a bit stretched due to more resistive incumbents, the deal pipeline looks good. While margins have slipped in this quarter, we already build in a 200bps moderation in FY14 over FY13.

Metrics: Net headcount declined by 1,561 to 47,498 and the BPO headcount by 1,013 to 21,552. IT utilisation (incl. trainees) was up marginally to 77% vs. 76% in 3Q. Active clients increased by 11 to 151. One additional client moved to the >US$ 15mn bucket.

Valuations cheap, maintain BUY: Overall a healthy quarter with better-than-expected revenues. We remain positive on the stock with a TP of Rs 1,200 based on 11x FY14 pro-forma P/E. We believe update on the merger process and continued deal traction will be the key triggers for a valuation re-rating. Maintain BUY.

Source : Equity Bulls

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