Accumulate Tech Mahindra - Elara Capital

• Tech Mahindra
• Rating : Accumulate
• Target Price : INR836
• Upside : 13%
• CMP : INR738 (as on 26 July 2010)

Disappointing quarter

Below estimate numbers

Tech Mahindra reported numbers below our estimates as high GBP exposure and lower pass through revenue on the SI projects led to lower profitability. Currency impacted EBIT by 230bps qoq. Pass through revenue was lower by USD 7mn in this quarter. We note that SI revenues are by definition lumpy and even out on a yoy basis. In USD terms, the revenue from BT was down 5% qoq. Costs in absolute terms were higher as headcount spiked and SG&A in absolute terms grew by 5% qoq in spite of a fall in topline. This quarter also saw a spike in unbilled revenues and DSOs moved up from 84 to 96.

Utilizations fall but pricing remains steady

While the Company's IT services utilizations fell by 400bps on a qoq basis, management maintained that pricing has remained steady. The qoq fall of 480 bps was entirely driven by currency fluctuations and the drop in utilization. Net headcount increased by 1501 inspite of IT services annualized attrition of 27%. We note that we will need to see a steady state quarter to figure out if there have been further cuts to pricing after Q3 FY11.

No Satyam update; provides the upside

There are has been no new update on the Satyam front. Our channel checks indicate that there are deal flows into Satyam even as the attrition in middle management ranks have risen to almost unmanageable levels.

Largely holding estimates; maintain target price

We are adjusting our estimates down and holding our target price. The stock price is likely to come under some near term pressure but the upsides from deal flow and a positive surprise on Satyam makes us hold the target price.

Source : Equity Bulls

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