Tech Mahindra - Analyst Meet Update - IndiaNivesh

Tech Mahindra Ltd (TechM) hosted their first analyst meet on Wednesday, September 11, 2013 after the completion of the merger. The essence of meet was skewed towards how management will utilize the merger synergies in order to scale the business. Along with this, the management and the heads of various SBUs such as Telecom, BFSI, manufacturing, enterprise, VAS, Platforms, IMS and Engineering services spoke about the trends and opportunities they foresee.

Key Takeaways

Robust revenue target on back of 4 growth pillars

In case of TechM, management targets $5 bn (v/s $2.6 bn in FY13) of revenue in FY15 on back of four prong strategies. These are as follows:

(I) Business Momentum:- Aggressively SG&A expenditure in momentum verticals like Telecom, BFSI, Manufacturing & Engineering.

(II) Platform, Processes & Services:- Introduction of various platform [e.g. XPEDO, CAPIO & BPaas] and processes along with BPO services.

(III) Innovation & Nurturing:- High investment in products [like merchant business solution, interoperable payments system, personal cloud for consumers, mobile money scheme operator] and technology [Mobility, Infrastructure, Internet & Consumer Services, Enterprise Software] innovations.

(IV) Acquisitions & Integration:- Focus on acquisitions [e.g Hutchison global services] and integration [Comviva & Vcustomers] in new age IT services and newer geographies.

The managements $-revenue target demands ~32.7% CAGR growth over the next two years, which would be possible only on back of inorganic expansion. However, organically we expect TechM's $-revenue to grow by 14%/11% Y/Y in FY14E/FY15E. Given the strong cash balance (~$500 mn) and treasure stocks (~10.4% of total shareholding) the company balance sheet supports inorganic expansion.

Diversification brings traction in large deal wins

On the back of services and geographical diversity along with integrated infrastructure management services TechM demonstrated strong traction in large deal wins. During last twelve months, the company won 10 large deal wins [size ranging between $50 to $100 mn] and added 21 new logos. Further, the company's strategy to offer end-to-end services [fiber rollout, upgrade plans, Skype slashing rates, superfast broadband, radio spectrum sale, 4G wireless technology, telecom ventures and M&As] to European telco's with network management services should foster large deal wins. Additionally, the recent joint venture [Comviva], partnership and investments on new age IT will help the company bring differentiating factor to overall offerings.

Manufacturing to see high growth...

The slight improvement in the U.S and Europe could lead to improvement in the Manufacturing vertical. Post-merger, the company holds strong foot hold in the Manufacturing, contributing ~19% to its overall revenue [second largest contributor after telecom]. The company is seeing good demand coming from subsectors like automotive, aerospace, defence and hi-tech. TechM expects engineering, product life cycle management and supply chain management to be the top spend areas in manufacturing. The company has ~130+ active customers in this vertical, of which 25 are in the list of Fortune 500 companies.

Valuation & Outlook

At CMP of Rs.1,332, the stock is trading at 11.4x FY14E and 10.7x FY15E EPS estimate, which looks attractive relative to peers like TCS, Infosys and HCLT valuations. Further, the company's strong multi-year and multi-million dollar deal wins across key vertical increase revenue visibility. All recent acquisitions integrated well and contributed to overall revenue growth during the quarter. Additionally, the ramp-up of recent large size deal wins pressure on profitability will be partially offset by favourable currency movement. We believe portfolio diversity and scalability should bode well on revenue growth and margin expansion. We maintain BUY rating with a target price of Rs.1,504 on TechM [12.1x FY15E].

Source : Equity Bulls

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