Tech Mahindra Limited - Dominance in telecom; Growing enterprise strength - Antique

We retain our Buy rating on Tech Mahindra with a target price of INR2,030 per share. Our target price factors in a likely higher P/E (14x FY15e vs 13x earlier) and is based on equity, excluding treasury. Our Buy rating is driven by: 1) Growth in telecom is likely to be strong, led by recent deal wins and foray into new segments such as network management services; 2) Enterprise revenues (grew 18%) during 1HFY14; and 3) On track to report healthy 15-17% revenue growth from the enterprise segment during FY14e and FY15e, led by improving win ratios in both manufacturing and BFSI. Sustained pickup in telecom capex spends, as witnessed recently, may revive services spends, albeit with a lag of 12-15 months.

Telecom: Improving profile, recovery in capex to boost growth

Telecom contributes 47% to revenues. It grew 26% YoY during 1H. The company continues to maintain its leadership position as reflected in its recent management network services win (USD250m deal spread over five years) from KPN. Traditionally, network management has been the forte of equipment providers with IT service providers having a presence in only a few areas of network management. The management said telecom companies spend nearly 3x on network management as against IT. Successful implementation of the KPN deal should help open up new opportunities for the company. As in telecom IT, deal sizes here are large and the firm intends to showcase its KPN deal to improve penetration levels in this space. Revenues from KPN are likely to increase 75% YoY over the next 12 months.

See early signs of capex pick-up in telecom:

Media reports indicate that capex spending from telecom service providers is finally reviving post the lull seen in the last two-to-three years. The management sees early signs of a pick-up and said service providers typically gain with a lag of 12-15 months. While revenue visibility is high, a sustained capex recovery should help sustain revenue growth rates over the next three-to-four years.

Strong deal wins in manufacturing

Manufacturing contributes 19% to revenues and grew 18% YoY during 1HFY14. The management said the deal pipeline continues to remain healthy. The company recently closed two-to-three deals over USD100m, which should help fuel growth. With annual revenues of USD600m, it has acquired scale and presence to improve penetration levels in deals.

Valuations

We forecast consolidated EPS of INR114 for FY14e and INR133 for FY15e. The stock trades at 14x FY15e.We value the stock on EPS, excluding treasury. We retain our Buy rating with a target price of INR2,030 per share.

Source : Equity Bulls

Keywords