Tech Mahindra Q3FY11 Result Update; Where's the growth? retain HOLD; Target: Rs 730

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Tech Mahindra

Where’s the growth? retain HOLD

HOLD

CMP: Rs 689                                       Target Price: Rs 730

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n     Rev gwth at 1.6% (like to like basis) missed est. of +4.8% QoQ, pales in comparison to strengthening growth at peers. Mgns declined by ~110 bps QoQ(V/s exp of -50 bps QoQ)

n     Standalone Profits at ~Rs2.1 bn, +29%QoQ driven by forex gains of ~Rs 520 mn. Net adds tepid at ~200 with attrition continuing to be high at 30% on a qtrly annualized basis

n     Raise FY11/12/13 adjusted EPS by ~8.8/4.2/2% to Rs 51.4/61.3/66.4 driven by lower currency resets, higher fx gains in FY11 despite marginal cut in US$ revenue estimates

n     Valuations inexpensive at ~11.2/10.4x FY12/13E EPS, however fair given sober growth vis-a-vis improving growth at peers. HOLD with a revised TP of Rs 730(V/s Rs 810 earlier)

Where’s the growth?

Tech Mahindra’s Dec’10 results indicate the vagaries of exposure to single vertical and

high exposure to a fewer set of clients, which in the recent past has continued to drag

co’s financial performance V/s peers. While most of the industry peers continue to report

improvement in revenue growth, Tech M’s reported revenues (in US$ terms) were up by

an anemic 1.6% sequentially on a like to like basis missed expectations of ~4.8%

increase). (Note that revenues were flat QoQ in constant currency terms) Op margins

were at 20.6%, down by ~110 bps sequentially (like to like basis) V/s expectations of

~50 bps decline. Standalone profits at ~RS 2.1 bn (+29% YoY) beat expectations driven

by forex gains of ~Rs 520 mn. Revenues from top client were flat QoQ at ~GBP 75 mn.

Co added 2 new clients during the quarter to take the total client count to 126 with an

increase in no of 10 mn+ clients to 15(V/s 14 in Sep’10 qtr). Utilization during Dec’10 qtr

is near historical highs at ~76%, with co looking to reduce it going ahead with fresher

hiring (~4k campus offers for FY12).

Upping FY11/12/13E adjusted earnings by 8.8%/4.2%/2.2% respectively

We tweak our earnings model for (1) marginally lower US$ revenue assumptions, (2)

reset currency assumptions to Rs 45/$ (V/s Rs 44/$ earlier) and incorporate higher forex

gains in Dec’10 driving a 8.8%/4.2%/2.2% increase in our FY11/12/13E adjusted

earnings to Rs 51.4/61.3 /66.4 respectively.

Retain HOLD with a revised TP of Rs 730

We retain HOLD on TechM with a revised target price of Rs 730, based on 11x adjusted

FY13 earnings. Valuations no doubt are inexpensive at ~11.2x/10.4x FY12/13E

earnings, however are fair in view of Tech M’s sombre revenue growth as compared to

a strengthening revenue profile both at Tier 1 peers as well as smaller Tier 2 peers with

company hoping of a pickup in demand prospects in the telecom vertical in H2CY11