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B T c o n t r a c t a t r i s k …
Tech Mahindra (TECHM) reported Q1FY12 revenues of | 1,292 crore vs.
our | 1,268 crore estimate led by growth in non-BT revenues. The EBITDA
margin at 18.7% was below our 20.6% estimate led by a 278 bps decline
in gross margins as the company hired 4,517 employees, which includes
~2,800 for the Africa BPO. Though incremental hiring could be argued for
better performance in subsequent quarters, we believe there are near
term challenges as the company’s largest client British Telecom (BT) has
put a significant portion of its outsourcing business for tender while salary
hikes in Q2FY12 could impact margins. We anticipate greater competition
for BT contract this time given BT has reduced its stake in TECHM to
24.4% (~30% earlier). Finally, though we maintain HOLD rating we note
that merger with Mahindra Satyam remains the only trigger for the stock.
ƒ Operating highlight
BT revenues grew 1.5% QoQ to $115.9 million while non-BT
revenues grew 5.8% sequentially. Top 5 excluding top 1 client likely
grew 4.1% QoQ while top 6-10 clients have grown 4.1% QoQ.
Geographically, the US contribution was flat at 32% while the rest of
the world was 17% (16% in Q3). EBITDA margins declined 110 bps
QoQ. Utilisation was at 71% vs. 74% last quarter. It beat estimates at
the PAT level (| 276 crore vs. | 198 crore estimate) helped in part by
| 96 contribution by Mahindra Satyam.
V a l u a t i o n
We continue to value TECHM at 7x our FY13E EPS estimate of | 65.9 plus
value of holding in Mahindra Satyam. Rationale for lower P/E multiple
includes feeble revenue growth and visibility from its largest customer
BT. We continue to apply a 15% holding discount for Mahindra Satyam
considering the company has settled a majority of its lawsuits and that
restructuring continues to take its course.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
B T c o n t r a c t a t r i s k …
Tech Mahindra (TECHM) reported Q1FY12 revenues of | 1,292 crore vs.
our | 1,268 crore estimate led by growth in non-BT revenues. The EBITDA
margin at 18.7% was below our 20.6% estimate led by a 278 bps decline
in gross margins as the company hired 4,517 employees, which includes
~2,800 for the Africa BPO. Though incremental hiring could be argued for
better performance in subsequent quarters, we believe there are near
term challenges as the company’s largest client British Telecom (BT) has
put a significant portion of its outsourcing business for tender while salary
hikes in Q2FY12 could impact margins. We anticipate greater competition
for BT contract this time given BT has reduced its stake in TECHM to
24.4% (~30% earlier). Finally, though we maintain HOLD rating we note
that merger with Mahindra Satyam remains the only trigger for the stock.
ƒ Operating highlight
BT revenues grew 1.5% QoQ to $115.9 million while non-BT
revenues grew 5.8% sequentially. Top 5 excluding top 1 client likely
grew 4.1% QoQ while top 6-10 clients have grown 4.1% QoQ.
Geographically, the US contribution was flat at 32% while the rest of
the world was 17% (16% in Q3). EBITDA margins declined 110 bps
QoQ. Utilisation was at 71% vs. 74% last quarter. It beat estimates at
the PAT level (| 276 crore vs. | 198 crore estimate) helped in part by
| 96 contribution by Mahindra Satyam.
V a l u a t i o n
We continue to value TECHM at 7x our FY13E EPS estimate of | 65.9 plus
value of holding in Mahindra Satyam. Rationale for lower P/E multiple
includes feeble revenue growth and visibility from its largest customer
BT. We continue to apply a 15% holding discount for Mahindra Satyam
considering the company has settled a majority of its lawsuits and that
restructuring continues to take its course.
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