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Tech Mahindra- Jaded growth, reducing price target…
Tech Mahindra reported Q3FY11 revenues of | 1,211 crore vs. our |
1,241 crore estimate led by sluggish growth in both BT and non-BT
revenues. EBITDA margins declined 90 bps QoQ due to wage hikes and
F/X headwinds. Feeble net additions, 30% quarterly annualised attrition
coupled with high utilisation, which continues to top the comfort band
of 68-76%, leaves limited upside for operational improvement till
campus hires join. Consequently, though we have maintained our ADD
rating on the stock we have reduced our price target to | 750 (| 790
earlier) and continue to prefer HCL Technologies to Tech Mahindra.
ƒ Operating highlights
On a reported basis and adjusted for one-offs in Q2FY11, BT
revenues grew ~4.8% QoQ to $118 million while non-BT revenues
were flat (-0.4% decline) sequentially. Top 5 excluding top 1 client
have likely declined 17% QoQ while top 6-10 clients have grown
31% QoQ. Geographically, the US contribution was back to its usual
32% levels (25% in Q2FY11) while the rest of world was 14% (32%).
Q2FY11 numbers were skewed due to the large contracts signed in
India. EBITDA margins declined 90 bps QoQ. Utilisation continues to
top the comfort band of 68-76%. The company saw significant
churn across the client pyramid with one addition each in US$1-2
million, US$2-5 million, US$10-15 million and US$15-20 million
bracket and reduction of two in the US$5-10 million bracket.
However, incremental additions in the US$25-50 and US$50 million
plus bracket continue to elude the firm.
Valuation
We have modestly adjusted our estimates and have now included profit
from associates (Mahindra Satyam). Thus, we are modelling FY11E and
FY12E EPS of | 56.8 (| 48.2 earlier) and | 57.8 (| 49.3 earlier). That said,
we are reducing our price target to | 750 (| 790 earlier) as we have
assigned a lower P/E multiple of 9.3x (10x earlier) to account for feeble
revenue growth in both BT and non-BT accounts. We have also increased
the holding discount for Mahindra Satyam to 15% (10%) to account for its
inconsistent performance.
Risk & Concerns
Though the pound, euro and Australian dollar created tailwinds in
Q3FY11, cross currency volatility remains a key concern. The 9MFY11
average rupee/$ rate stood at 45.6. Were the rate to remain at today’s
levels for the remainder of the year, the average rupee/$ rate could be
45.5 for FY11E vs. 47.3 for FY10, or an appreciation of ~3.8%.
Incremental appreciation from these levels would create downside risks
to our estimates. As a reminder, every 100 bps movement in the currency
impacts operating margin by ~20-50 bps depending on the operating
model
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Tech Mahindra- Jaded growth, reducing price target…
Tech Mahindra reported Q3FY11 revenues of | 1,211 crore vs. our |
1,241 crore estimate led by sluggish growth in both BT and non-BT
revenues. EBITDA margins declined 90 bps QoQ due to wage hikes and
F/X headwinds. Feeble net additions, 30% quarterly annualised attrition
coupled with high utilisation, which continues to top the comfort band
of 68-76%, leaves limited upside for operational improvement till
campus hires join. Consequently, though we have maintained our ADD
rating on the stock we have reduced our price target to | 750 (| 790
earlier) and continue to prefer HCL Technologies to Tech Mahindra.
ƒ Operating highlights
On a reported basis and adjusted for one-offs in Q2FY11, BT
revenues grew ~4.8% QoQ to $118 million while non-BT revenues
were flat (-0.4% decline) sequentially. Top 5 excluding top 1 client
have likely declined 17% QoQ while top 6-10 clients have grown
31% QoQ. Geographically, the US contribution was back to its usual
32% levels (25% in Q2FY11) while the rest of world was 14% (32%).
Q2FY11 numbers were skewed due to the large contracts signed in
India. EBITDA margins declined 90 bps QoQ. Utilisation continues to
top the comfort band of 68-76%. The company saw significant
churn across the client pyramid with one addition each in US$1-2
million, US$2-5 million, US$10-15 million and US$15-20 million
bracket and reduction of two in the US$5-10 million bracket.
However, incremental additions in the US$25-50 and US$50 million
plus bracket continue to elude the firm.
Valuation
We have modestly adjusted our estimates and have now included profit
from associates (Mahindra Satyam). Thus, we are modelling FY11E and
FY12E EPS of | 56.8 (| 48.2 earlier) and | 57.8 (| 49.3 earlier). That said,
we are reducing our price target to | 750 (| 790 earlier) as we have
assigned a lower P/E multiple of 9.3x (10x earlier) to account for feeble
revenue growth in both BT and non-BT accounts. We have also increased
the holding discount for Mahindra Satyam to 15% (10%) to account for its
inconsistent performance.
Risk & Concerns
Though the pound, euro and Australian dollar created tailwinds in
Q3FY11, cross currency volatility remains a key concern. The 9MFY11
average rupee/$ rate stood at 45.6. Were the rate to remain at today’s
levels for the remainder of the year, the average rupee/$ rate could be
45.5 for FY11E vs. 47.3 for FY10, or an appreciation of ~3.8%.
Incremental appreciation from these levels would create downside risks
to our estimates. As a reminder, every 100 bps movement in the currency
impacts operating margin by ~20-50 bps depending on the operating
model
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