Sell Tech Mahindra : Target Rs 735 says Kotak Sec

Raise target price post Satyam financials disclosure; retain REDUCE. We raise our
end-FY2012E target price on TM to Rs735/share (Rs705 earlier). We now use our target
price for Mahindra Satyam (MS) to value TM’s stake in the company; we were assigning
an ‘uncertainty’ discount to the market price earlier. TM consolidated (with MS) EPS for
FY2011E/12E works out to Rs69/Rs68 respectively. TM will likely trade on merger ratio
speculation in the near-term; we retain our REDUCE rating on fundamentals.


Raise target price to Rs735/share (from Rs705) post Satyam FY2009/10 financial disclosures
We revise our target price on TM to Rs735/share from Rs705 earlier. We now use our target price
for Mahindra Satyam (MS) to value TM’s stake and remove the 20% discount we had attached to
the same earlier, given visibility on MS financials and expected merger of the two companies. Our
SOTP-based target price comprises
􀁠 Rs353/share fair value estimate for the core business. We value TM’s core business based on a
PE multiple of 10X FY2012E adjusted EPS of Rs35.3/share. We adjust our EPS estimate for the
deferred revenues being booked for the Rs9.7 bn payout received from BT, being recognized at
the revenue line (for 19 quarters, starting 1QFY10).
􀁠 Rs74/share for the cash received from BT.
􀁠 Rs306/share from TM’s 42.7% stake in MS. This is based on our fair value estimate of
Rs80/share for MS. We have reinitiated coverage on MS and forecast an EPS of Rs5 for FY2011E
and Rs5.4 for FY2012E for the company.