Tech Mahindra - Healthy demand traction - IDFC

We recently met the management of Tech Mahindra (TechM) and gathered from our interaction that demand traction is being seen across both telecom and nontelecom business. Key takeaways of our meeting are:

- Healthy market share-led traction in telecom: Growth in AT&T, significant deal wins from KPN and new clients in Africa/ UK have accelerated growth (~6.5% CQGR for last four quarters) in telecom. TechM continues to gain market share from incumbents in run-the-business IT spend. BT weakness is likely to continue, though it now has a lower revenue share (~12%).

- Strong demand in non-telecom business: Deal funnel is healthy and growing with decisions being made. Manufacturing vertical is seeing deals across discretionary and non-discretionary spend. In BFSI, not-so-strong for erstwhile Satyam, TechM has bagged three large deals - one each in Americas, Europe and Asia Pac (US$50m-75m each for 3-5 years).

- Vision 2015 shows hunger for growth: TechM targets US$5bn in revenues by FY15, with increased focus on product, platforms and solutions. It plans to invest in Network, Mobility, Analytics, Cloud and Security with an eye on margins in line with the fastest growing peer.

- Operating margins to be in a narrow band: Low hanging margin levers have been utilized. INR and wages are two key margin determinants while employee pyramid still has some headroom (though improvement would be gradual).

We upgrade our earnings estimates by 6-9% for FY14-15 to incorporate demand traction and weaker INR (now building in Rs63/$ for the forecast period). We assume that INR benefits will be re-invested in business/ shared with clients. We build in 11.5% USD revenue CAGR and ~24% INR EPS CAGR over FY13-15E and value TechM at Rs1750 (13x avg FY14-15E EPS). Reiterate Outperformer as sustained healthy execution drives gradual re-rating for the stock.

Source : Equity Bulls

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