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TechM's challenges in the face of its muted growth recently versus peers have been added to
with the likely re-bid of some of the revenues from its largest client, BT, and increased macro
headwinds. This will put further pressure on already declining margins. We downgrade TechM to
Sell and prefer Satyam.
Further increase in revenue growth challenges
TechM’s caution regarding the likely re-bid of some of the revenues from its largest client British
Telecom (still 40% of revenues), recently increased macro headwinds from US/Europe (83% of
revenues) and continuing demand weakness from Telecom (around 100% of revenues) clearly
signal the growth challenges are likely to escalate for TechM going forward. Even some of
TechM’s recent deal wins (including in BPO and in markets outside the US/Europe) are unlikely
to provide any major defence to its increased earnings risk.
Further downside in margins likely
Besides increased risk on revenues, we believe 1QFY12 margins (down qoq by 183bp versus our
expectation of 50bp, adjusted EBITDA margin just at 15.4%) indicates that TechM’s margins are
likely to witness southward pressure given headwinds including: 1) wage inflation due in 2Q12
(likely to affect TechM more than peers due to its higher proportion of offshore deliveries); 2)
growth challenges from its top client BT (with pricing pressure likely); 3) required higher
investment to grow revenues from clients outside the top 10 (which contribute as much as 78%);
and 4) likely higher growth in low-margin services and markets outside US/Europe.
Downgrade to Sell; prefer Satyam Computers
We lower our adjusted EPS forecasts (ex amortisation of deferred revenue receipts from BT and
share of profits from Satyam) for FY12/13 by 8%/12% to factor in the increased risk to revenues
and margins explained above. Hence, we downgrade TechM to Sell for a target price of Rs643
(down from Rs715), discounting adjusted EPS (including profits from Satyam) by 10.5x FY13F.
We prefer Satyam over TechM considering its relatively lower earnings risk. We expect Satyam to
trade at a premium to TechM due to its improving growth and business diversification, while
TechM’s recent share price outperformance has led to valuation parity between the two (on the
basis of adjusted EPS for TechM).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
TechM's challenges in the face of its muted growth recently versus peers have been added to
with the likely re-bid of some of the revenues from its largest client, BT, and increased macro
headwinds. This will put further pressure on already declining margins. We downgrade TechM to
Sell and prefer Satyam.
Further increase in revenue growth challenges
TechM’s caution regarding the likely re-bid of some of the revenues from its largest client British
Telecom (still 40% of revenues), recently increased macro headwinds from US/Europe (83% of
revenues) and continuing demand weakness from Telecom (around 100% of revenues) clearly
signal the growth challenges are likely to escalate for TechM going forward. Even some of
TechM’s recent deal wins (including in BPO and in markets outside the US/Europe) are unlikely
to provide any major defence to its increased earnings risk.
Further downside in margins likely
Besides increased risk on revenues, we believe 1QFY12 margins (down qoq by 183bp versus our
expectation of 50bp, adjusted EBITDA margin just at 15.4%) indicates that TechM’s margins are
likely to witness southward pressure given headwinds including: 1) wage inflation due in 2Q12
(likely to affect TechM more than peers due to its higher proportion of offshore deliveries); 2)
growth challenges from its top client BT (with pricing pressure likely); 3) required higher
investment to grow revenues from clients outside the top 10 (which contribute as much as 78%);
and 4) likely higher growth in low-margin services and markets outside US/Europe.
Downgrade to Sell; prefer Satyam Computers
We lower our adjusted EPS forecasts (ex amortisation of deferred revenue receipts from BT and
share of profits from Satyam) for FY12/13 by 8%/12% to factor in the increased risk to revenues
and margins explained above. Hence, we downgrade TechM to Sell for a target price of Rs643
(down from Rs715), discounting adjusted EPS (including profits from Satyam) by 10.5x FY13F.
We prefer Satyam over TechM considering its relatively lower earnings risk. We expect Satyam to
trade at a premium to TechM due to its improving growth and business diversification, while
TechM’s recent share price outperformance has led to valuation parity between the two (on the
basis of adjusted EPS for TechM).
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