Tech Mahindra - Target Price of Rs. 1300 - Dolat Capital

Tech M has been our favorite since the last six quarters now, and we believe there is still potential for it to outperform next few quarters. Notably, post merger the combined entity would become fifth largest Indian IT company with a revenue of over USD 3.5bn, sales growth of 12%+ and EBIT margin of 15%+, quite comparable to HCL and Wipro in terms of profitability and with Wipro and Infosys on sales growth perspective.

- After successful integration with MSAT, Tech M has been turning for the better on key variables. It has announced acquisition of Hutchison captive BPO and 51% stake in Bharti's Global VAS provider entity, Comviva. It has also inked partnership with KPN Dutch Telecom (size about USD 100mn) and other with UK based TSP (about USD 70mn).

- The combined entity would gain on efficiency by optimum utilization of resources through better bench management, rationalization of office/centers across the globe and better procurement advantage.

- The combined entity would enrich in terms of service offerings, geographical presence, large client pool offering cross/up sell opportunities (Clients: TechM 130 ; MSAT 372) and a de-risked revenue model both in terms of client as well as vertical concentration.

- It has overcome most of its concerns with declining BT revenue share, settlement of various claims on Satyam (Upaid, Aberdeen, Class Action Suit), high losses turned into profits and client/employee attrition. As most of the concerns already addressed it would start gaining on business traction and better productivity.

We remain positive on the stock in view of its renewed proactive efforts to drive the revenue momentum, integration gains from Satyam and attractive valuations (7.5x FY15E earnings). We maintain our Buy recommendation on the stock with a target price of Rs. 1300, valued at 10x of FY15E earnings (associate share of MSAT included).

Source : Equity Bulls

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