Tech Mahindra Limited - Inline quarter; Revenue growth likely to accelerate - Antique

Tech Mahindra (TML) 4Q revenue growth were ahead of our estimates. Revenues grew by 7% QoQ, 4% ahead of our estimates, largely led by higher revenues from Comviva (recent acquisition) and a flattish growth at BT vs. management guidance of decline during the quarter. EBIT margins at 17%, down 137bps QoQ was in line with our estimates.

While we raise TML stand alone earnings by 1-2%, proforma earnings (including Satyam) cut by 2-3% to factor lower margin assumption at Satyam. Our revised Proforma earnings are at INR96 for FY14E and INR112 for FY15E. Stock trades at 8x FY15E. Roll forward earnings to FY15E and retain BUY on the stock with target price of INR1215 (11x FY15E).

Revenues ahead of expectation

4Q USD revenues grew at 7% QoQ to USD 353m, 4% ahead of our estimates. Outperformance largely led by higher contribution from Comviva, its recent acquisition and a flattish growth at top client. Management on the call indicated that while BT continues to focus on cost optimization, it is now investing in new initiatives. Consequently management now believes pace of decline likely to reduce/ bottom out in near term.

Revenue growth likely to accelerate

We retain our view that revenue growth likely to accelerate over FY13-15E. We forecast revenue CAGR of 13% over FY13-15E vs. 9% reported during FY11-13 led by organic and inorganic initiatives. Organic basis forecast revenue growth of 10% over FY13-15E vs 3% over last two years. This is despite a declining contribution to revenues from top client (BT). BT revenue contribution likely to decline from 31% (FY13E) to 22% (FY15E). Our assumption factors in ramp in KPN project, full consolidation of Hutch Global services revenues and recovery in revenues from AT&T post conclusion of ramp down by 4Q FY13.

Margins in line with expectations

EBITDA margins stood at 20%, decline of 108bps QoQ and 25bps ahead of our estimates. Margins largely impacted by cross currency and transition cost of new projects. Utilization levels (including trainees) improved by 100bps to 77%. Retain our margins assumptions for FY14E and FY15E. Recurring PAT stood at INR1961m, 1% lower than our expectation.

Merger update: Judgement due after court reopens

Management on the call indicated that hearing process is now completed and judgment has been reserved till court reopens in July. Management is cautiously optimistic on the outcome given Shareholders have already given their approval.

Valuation and out look

Forecast proforma EPS of INR IN96 for FY14E and INR112 for FY15E. Stock trades at 9.5x FY14E Proforma earnings (including Satyam) and 8x FY15E. We roll forward earnings to FY15E and retain BUY with target price of INR1215 (11x FY15E).

Source : Equity Bulls

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