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Tech Mahindra (TECHM)
Technology
Weak performance will overshadow inexpensive valuations. Tech Mahindra (TM)
reported a weak quarter with flat revenues in constant currency, 7% decline in EBITDA
and 110 bps decline in EBITDA margin. Likely anemic growth and cost pressure will lead
to weak near-term performance. Valuations at 10.5X FY2012E and 9.7X FY2013E
earnings are inexpensive; however, we would wait for a strong rebound in growth
(likely in 2H2011E) before taking a constructive view on the stock. REDUCE rating stays.
Difficult to find positives in 3QFY11 performance
TM’s net income of Rs2.06 bn was 24% higher than our estimate but boosted by (1) forex gain of
US$8 mn versus our estimate of a loss and (2) lower-than-expected ETR. Revenue of US$269 mn
(+1.6% qoq, +6% yoy) was 3% lower than our estimate. Revenues were flat in constant currency.
BT revenues were flat qoq in constant currency terms, while non-BT revenues grew 0.5% qoq
(adjusted for the large one-time pass-through revenues booked in 2QFY11). EBITDA margins
declined 110 bps qoq on account of (1) onsite wage revision of 3% and (2) rupee appreciation.
FY2012E outlook—a few hiccups. Growth may be back-ended
We have been positive on non-BT revenue growth potential for TM. Our positive stance is on the
back of return of telco capex cycle across countries as inevitable investments in next generation
network picks up. However, timing remains uncertain and growth may be back-ended as
compared to our earlier expectation of even-growth through FY2012E. We lower our FY2012E
revenue growth expectation by 4% translating into 17.6% company growth – 27% growth from
non-BT accounts (assuming ~6% currency-led US$ revenue growth in the BT account); note that
all growth numbers are adjusted for the one-time revenues in 2QFY11.
Margins will be under pressure in FY2012E, no surprises here
We remain cautious on TM’s margin profile. Supply-side situation in the industry remains
challenging – TM with a high attrition rate of 30% could face wage pressure ahead. Impact of
recent margin-dilutive deals (in our view) will likely add to the margin pressure. The company does
not have meaningful levers to defend profitability; price increase in the only way out. Our OPM
assumption for FY2012E is 18.8%, 180 bps lower than 3QFY11 levels.
Stock inexpensive but REDUCE rating stays pending clarity on discretionary spending
We lower FY2012E and FY2013E EPS estimates by 5% and 6% to Rs66 and Rs71. We lower our
fair value target to Rs720 from Rs735 earlier. While TM trades at inexpensive 10.5X FY2012E
earnings, we would wait for signs of release of discretionary spending in the TSP vertical before
taking a constructive view on the stock.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Tech Mahindra (TECHM)
Technology
Weak performance will overshadow inexpensive valuations. Tech Mahindra (TM)
reported a weak quarter with flat revenues in constant currency, 7% decline in EBITDA
and 110 bps decline in EBITDA margin. Likely anemic growth and cost pressure will lead
to weak near-term performance. Valuations at 10.5X FY2012E and 9.7X FY2013E
earnings are inexpensive; however, we would wait for a strong rebound in growth
(likely in 2H2011E) before taking a constructive view on the stock. REDUCE rating stays.
Difficult to find positives in 3QFY11 performance
TM’s net income of Rs2.06 bn was 24% higher than our estimate but boosted by (1) forex gain of
US$8 mn versus our estimate of a loss and (2) lower-than-expected ETR. Revenue of US$269 mn
(+1.6% qoq, +6% yoy) was 3% lower than our estimate. Revenues were flat in constant currency.
BT revenues were flat qoq in constant currency terms, while non-BT revenues grew 0.5% qoq
(adjusted for the large one-time pass-through revenues booked in 2QFY11). EBITDA margins
declined 110 bps qoq on account of (1) onsite wage revision of 3% and (2) rupee appreciation.
FY2012E outlook—a few hiccups. Growth may be back-ended
We have been positive on non-BT revenue growth potential for TM. Our positive stance is on the
back of return of telco capex cycle across countries as inevitable investments in next generation
network picks up. However, timing remains uncertain and growth may be back-ended as
compared to our earlier expectation of even-growth through FY2012E. We lower our FY2012E
revenue growth expectation by 4% translating into 17.6% company growth – 27% growth from
non-BT accounts (assuming ~6% currency-led US$ revenue growth in the BT account); note that
all growth numbers are adjusted for the one-time revenues in 2QFY11.
Margins will be under pressure in FY2012E, no surprises here
We remain cautious on TM’s margin profile. Supply-side situation in the industry remains
challenging – TM with a high attrition rate of 30% could face wage pressure ahead. Impact of
recent margin-dilutive deals (in our view) will likely add to the margin pressure. The company does
not have meaningful levers to defend profitability; price increase in the only way out. Our OPM
assumption for FY2012E is 18.8%, 180 bps lower than 3QFY11 levels.
Stock inexpensive but REDUCE rating stays pending clarity on discretionary spending
We lower FY2012E and FY2013E EPS estimates by 5% and 6% to Rs66 and Rs71. We lower our
fair value target to Rs720 from Rs735 earlier. While TM trades at inexpensive 10.5X FY2012E
earnings, we would wait for signs of release of discretionary spending in the TSP vertical before
taking a constructive view on the stock.
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