Tech Mahindra - Rating: BUY; Target Price: Rs2,180 - Centrum

We anticipate rupee appreciation to have an impact on reported rupee revenue and TechM to have a QoQ growth of 1.5% in USD terms (but only 0.8% in INR terms). We expect TechM to also lag the peer group this quarter in terms of growth as furloughs are more common across Telecom and Manufacturing than other sectors (66% of TechM's revenues come from these two verticals).

During the quarter, we expect utilizations to fall slightly (by 100bps) as furloughs and the addition of trainees, pull down effective utilizations. We expect margins to hold up fairly well with just 11bps QoQ decline in EBITDA margins to 23.2%.

We believe that TechM can partially offset the effect of 4QFY14 wage hikes through improved utilization and slightly lower onsite ratios. We continue to anticipate that TechM will be able to retain the Barcelona and Andes contracts that are up for renewal by the end of this quarter.

Earnings revised upwards: We are increasing our PAT by 3.5%/3.0% for FY14E/FY15E respectively as we reduce the anticipated impact of the wage hike and increase our utilization assumptions for 4QFY14. We increase our Dec'14 TP to Rs2,180 (Vs 2,090 earlier) based on 13x 1-year Fwd EPS from Dec'14.

Source : Equity Bulls

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