Tech Mahindra - Well placed... - Motilal Oswal

...Continued revenue traction; concerns on cash and margins allayed

- TECHM expects traction in revenue growth to continue in FY15 as well, with deal signings and pipeline both remaining healthy

- Cash conversion in FY14 was hit by one-offs like acquisition payouts, stamp duty. Normalized cash conversion quality is comparable to tier-I IT.

- Amid steady revenue and profit growth, despite the continued hunt for acquisitions, we see the payout ratio increasing going forward.

- 50% of the margin headwinds should be offset by levers. If growth remains strong, margin headwinds in FY15 will be completely offset.

FCF in FY14 hit by one-offs; conversion quality comparable to tier-I

TECHM brushed aside the concerns around low Free Cash Flow (FCF) generation during the year, explained by multiple one-offs like stamp duty payment, payout towards the acquisitions of Complex IT and Comviva. Going forward, we expect the company's cash conversion quality to compare with top tier peers.

Impending margin headwinds should be offset by multiple levers

TECHM should be able to offset ~50% of the 250-300bp impending margin headwinds from wage hikes and discontinuation of restructuring fees from BT. If growth remains healthy, it should be able to offset. the entire impact. We model 21.6% EBITDA margin in 4QFY14 (-160bp QoQ) and 22.1% EBITDA margin in FY15.

Sustained revenue traction; expect dividend payout to improve

Despite continued pressure in the BT account, TECHM is seeing sustained momentum in business to at least grow in line with the industry. With loans repaid, FCF generation to be strong and revenue growth healthy, despite its ongoing hunt for acquisitions, we expect TECHM to up its dividend payout ratio going forward.

Well placed in addressing demand trends; Buy

Success in large deal wins in the last 3 quarters is an encouraging indicator of TECHM's improving competitive prowess post the integration with Satyam, and alleviates growth concerns emanating from client-specific issues like BT. Also, its expertise in the Telecom vertical has thus far overshadowed the structural concerns in the clients' business, as it continues to increase its share within its top accounts, opportunity going forward offered by Continental Europe. We expect TECHM to grow its USD revenues at a CAGR of 14.8% over FY14-16 and EPS at a CAGR of 16% during this period. Our Target Price of INR2,350 discounts FY16E EPS by 14x. TECHM remains among our preferred picks in the Technology space.

Source : Equity Bulls

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