Tech Mahindra Ltd. - Q3FY14 Update, CMP Rs.1837, Maintain Accumulate with increased Target of Rs.2100 - Sushil Finance

TECH MAHINDRA LTD. - Q3FY14 RESULT UPDATE - CMP Rs.1837, Maintain Accumulate with increased Target of Rs.2100

Decent USD Revenue growth led by strong growth in US & BFSI

The Q3FY14 Results of Tech Mahindra were better than the expectations. Its USD Revenues grew 4.4% QoQ to USD 791 mn, led by strong 11.5% QoQ growth from US market & 15.9% QoQ growth in BFSI vertical. The manufacturing & telecom verticals grew 4.4% QoQ. The European market, which saw a strong growth in Q2, declined 2% QoQ due to completion of a telecom project. In constant currency term, its USD Revenue grew 3.4% QoQ and its INR Revenues grew by 2.7% QoQ to Rs. 48,985 mn. Going forward, we expect Tech Mahindra to continue its strong growth momentum in Non-BT telecom accounts along with the decent growth in other verticals such as manufacturing, BFSI, TME and Retail.

EBITDA Margins remained flat QoQ at 23.2%

Its EBITDA for Q3FY14 grew 2.3% QoQ to Rs. 11,360 mn, while the EBITDA margins was marginally down (10 bps QoQ) at 23.2%, mainly on account of reduction in SG&A cost on QoQ. With sharp fall in other income (Rs. -457 mn v/s Rs. 380 mn in Q2) led by exchange loss of Rs. 1,414 mn, its APAT declined 7.7% QoQ to Rs. 6,633 mn. However, on account of reversal of tax provision (Rs. 2,266 mn) and write back of excess provisions for contingencies (1,200 mn) related to erstwhile Satyam, its RPAT grew 40.6% QoQ to Rs. 10,099 mn.

Considering the impact of net addition of 4290 people during 9MFY14 and wage increment (7% offshore, 2.5% onsite) effective Jan'14, we expect its EBITDA margins to remain at 22.6% in FY14 and to stabilize thereafter at 21.5% level.

Large Deal wins in Q3; Deal Pipeline looks decent

During Q3FY14, the company closed several large deals which include a managed services deal by leading financial services group in Australia, a large transformational IT services deal by US based insurance service provider, an application maintenance outsourcing deal by a leading automotive company in Europe, and deal from an Asian telecom company. The TCV of all the deals signed during Q3 was close to ~USD 225 mn. The deal pipeline also looks decent in both enterprise application and Telecom space.

Strong balance sheet with high Return ratio

The balance sheet of combined entity is very strong with high net cash & cash equivalent of Rs. 31.2 bn as on Dec'13. The return ratios have also improved significantly with strong RoCE (33%) & RoE (35.5%) for FY13. We expect the company to maintain its return ratios at these levels going forward. The company has already reached the annual business run-rate of USD 3 bn and it can utilize the higher cash in the balance sheet for M&A activities in order to achieve its vision of reaching USD 5 bn Revenues in next two years.

OUTLOOK & VALUATION

With ~25% CAGR in last six year in Non-BT accounts, compensating for decline in BT account, Tech Mahindra expects its Non-BT accounts to deliver decent growth, while BT's revenue is expected to be muted in short-term due to its internal rationalization program and stabilize going forward. The synergy from merger of Mahindra Satyam has further strengthen its market positioning as its expertise in enterprise solution space along with Tech Mahindra expertise in managed services is helping it in exploring new businesses opportunities across the markets and verticals.

In view of its strong 9MFY14 performance & business outlook, we have largely maintained our FY14E & FY15E Revenues & APAT estimates. We expect Tech Mahindra to deliver 24.5% CAGR in Revenue and 25.5% CAGR in APAT during FY13-15E. At CMP of Rs.1837, the stock is trading at 15.3x & 13.1x its FY14E & FY15E Earnings of Rs.120.4 & Rs.140 respectively. We have valued the stock at 15x its FY15E EPS and maintain our 'Accumulate' Rating with an increased target price of Rs.2100.

Source : Equity Bulls

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