Tech Mahindra Marginal beat on estimates, retain HOLD :: Emkay

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Tech Mahindra

Marginal beat on estimates, retain HOLD

HOLD

CMP: Rs787                                        Target Price: Rs810

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n     Rev(ex H/W) at US$ 265 mn(+5.4% QoQ) beat exp marginally. Mgns (ex H/W) at 21.5%, were up by ~280 bps QoQ driven by favorable currency, higher utilization & lower employee count

n     Top client rev were  flat in constant currency terms at ~GBP 75 mn while revenues(ex BT, SI ) were up by 8.5% sequentially to US$ 150 mn

n     Tweak FY11/12E conso EPS up by ~2.8%/0.3% to Rs 69.6/77.5 despite higher rev est. driven by higher currency reset helped by lower FY12 tax assumptions at 21%(V/s 23% earlier)

n     Maintain HOLD with a revised TP of Rs 810(based on 11.5x 1 yr fwd P/E). See near term upsides driven by possibility of a favorable merger ratio( for TechM)  with Mah Satyam

Marginal beat on revenues, margins boosted by currency tailwinds

Tech Mahindra reported revenues of US$ 328 mn (+31% QoQ, inclusive of one time SI

revenues). Recurring revenues were up by ~5.4% sequentially to US$ 264.7 mn( Emkay

est of US$ 263 mn). EBITDA margins(ex one offs) improved by ~280 bps QoQ to

21.6%, however helped by (1) favorable currency( both cross currency tailwinds and

US$/INR depreciation on an avg), and (2) higher utilization ( at historical peak levels of

~75%, up by ~600 bps sequentially), helped further by lower employee count(employee

total HC down by ~1,260 QoQ as co’s attrition jumped up to 30% annualized V/s 27%

in June’10 qtr). Revenues from top client BT were flat at GBP 75 mn( marginally ahead

of co’s stated range of GBP 72-74 mn) while revenues from non top 10 clients were up

by 8.5% sequentially to US$ 150 mn (ex SI revenues of ~US$ 63.5 mn). Non top 10

revenue growth was impressive at ~16% to US$ 52.5 mn. Profits at Rs 1,506 mn,

included losses on a/c of Mahindra Satyam’s FY10 losses apportioned for ~42.7%

stake.

Upping FY11/12E consolidated earnings by ~2.8%/0.3%

We tweak our earnings model for (1) higher FY11/12E US$ revenues at US$ 1133

mn/US$ 1252 mn(+16%/10.5% YoY, V/s US$ 1,052 mn/US$1,180 mn), (2) reset

currency assumptions to Rs 44/$(V/s Rs 46/$) and (3) lower tax rate assumptions to

21%( V/s 23% earlier) for FY12 resulting in our FY11E/FY12E earnings getting upped

by ~2.8%/0.3% to Rs 69.6/77.5 respectively. We also model in FY13E earnings of Rs

83.5.

Retain HOLD with a raised TP of Rs 810

We retain HOLD on TechM with a revised target price of Rs 810, based on 11.5x

adjusted 1 yr fwd consolidated earnings. However we see near term upsides for the

stock driven by the possibility of the merger( with Mahindra Satyam) ratio emerging in

favor of Tech M in the case of consolidation of the two entities post declaration of

Mahindra Satyam’s results.