Tech Mahindra - Strong margin performance raise target price; Hold :: Anand Rathi

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Tech Mahindra - Strong margin performance raise target price; Hold 

n       Raise target price; maintain Hold. TechM’s 2QFY11 profit surpassed our expectations, with higher revenue and margin (favorable cross-currency movements, higher utilization and lower SG&A costs). We raise our FY11e and FY12e EPS 11.4% and 8.7% respectively to factor in the higher margin forecast. We increase the target price to `845 from `800 and maintain Hold.

n       2QFY11 propped up by the strong margin. 2Q revenue grew 5.4% qoq; in dollar terms, it was up 4.5% (on constant currency). Lower SG&A costs, favorable cross-currency movements and higher utilization led to margins increasing 290bp qoq (excluding the pass-through revenue of `3bn and associated costs). TechM saw volume growth of 4.5% qoq. Non-BT revenue grew 9.5% qoq.

n       Key takeaways. TechM added seven clients (increasing the total to 124). Blended utilization was up 600bp qoq to 75%. Emerging markets saw a healthy growth of 31.5% qoq. We believe BT revenue would remain stable at £70-72m per quarter.

n       Valuation and risks. Our revised target price of `845 comprises `600 for core business (we maintain Sep ’11e earnings at 11x) and `245 (for TechM’s 42.7% holding in Satyam, after 25% holding-company discount). Upside/downside risk: higher/lower-than-estimated volumes of BT deal.

n       Satyam’s financials. We await further clarification from management regarding the current quarterly revenue run-rate (exit run-rate), margins post wage hikes, and utilization levels due to be disclosed on 15 Nov ’10.