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UBS Investment Research
Tech Mahindra
M argins lacklustre despite in-line revenue
Revenue in-line; profit ex. Satyam beat estimates on higher other income
Tech Mahindra (TechM) 1QFY12 consolidated revenue came in at Rs12.9bn, up
2.5% QoQ. Dollar revenue was US$290mn (up 4.1% QoQ), in-line with our
estimate. Revenue from top client, British Telecom (40% of revenue), remained
sluggish growing at 1.6% QoQ to US$116mn led by currency gain. Net income at
Rs2.8bn was higher than our estimate of Rs2.0bn, due to high other income
(Rs461mn vs. est. of Rs120mn) and associate income.
Operating margin declined 180bp QoQ vs. our estimate of 100bp
In 1QFY2012, operating margin declined 180bp QoQ to 18.7% lower than our
estimate of 19.5%. This was due to lower utilisation of 71% (down 300bps QoQ)
and increase in contribution from low margin BPO business. We expect the
margins to decline further in 2Q led by wage hike.
Robust growth in emerging markets/BPO, but margins likely to be lower
While emerging market contributing 19-20% of revenue grew 14% QoQ, BPO
grew 21% QoQ. However, emerging markets and BPO business have a lower
margin profile. Given the high contribution to incremental growth from emerging
market/BPO, the company’s margin is likely to be reset to lower level over the
medium term.
Valuation: maintain Neutral with PT of Rs780
We reiterate our Neutral rating and DCF based price target of Rs780.
Tech Mahindra
Tech Mahindra (TechM) is an IT services company catering to the global
telecommunications industry. It is joint venture between Mahindra Group and
British Telecommunications. TechM's service offerings include application
development and maintenance, business process outsourcing (BPO) and
infrastructure management. TechM derives around 60% its revenue from Europe
and BT is its largest client.
Statement of Risk
Tech Mahindra derives all of its revenues from the telecom vertical. Any
slowdown in Telecom industry IT spend may adversely impact Tech Mahindra's
revenues. Tech Mahindra derives about 75% of revenues from it top two clients,
which exposes it to any adverse developments at the top clients. We believe that
lack of expertise beyond telecoms may limit cross-selling opportunities for the
company. Additional risks include currency risk, weakness in the global
economy and salary inflation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Tech Mahindra
M argins lacklustre despite in-line revenue
Revenue in-line; profit ex. Satyam beat estimates on higher other income
Tech Mahindra (TechM) 1QFY12 consolidated revenue came in at Rs12.9bn, up
2.5% QoQ. Dollar revenue was US$290mn (up 4.1% QoQ), in-line with our
estimate. Revenue from top client, British Telecom (40% of revenue), remained
sluggish growing at 1.6% QoQ to US$116mn led by currency gain. Net income at
Rs2.8bn was higher than our estimate of Rs2.0bn, due to high other income
(Rs461mn vs. est. of Rs120mn) and associate income.
Operating margin declined 180bp QoQ vs. our estimate of 100bp
In 1QFY2012, operating margin declined 180bp QoQ to 18.7% lower than our
estimate of 19.5%. This was due to lower utilisation of 71% (down 300bps QoQ)
and increase in contribution from low margin BPO business. We expect the
margins to decline further in 2Q led by wage hike.
Robust growth in emerging markets/BPO, but margins likely to be lower
While emerging market contributing 19-20% of revenue grew 14% QoQ, BPO
grew 21% QoQ. However, emerging markets and BPO business have a lower
margin profile. Given the high contribution to incremental growth from emerging
market/BPO, the company’s margin is likely to be reset to lower level over the
medium term.
Valuation: maintain Neutral with PT of Rs780
We reiterate our Neutral rating and DCF based price target of Rs780.
Tech Mahindra
Tech Mahindra (TechM) is an IT services company catering to the global
telecommunications industry. It is joint venture between Mahindra Group and
British Telecommunications. TechM's service offerings include application
development and maintenance, business process outsourcing (BPO) and
infrastructure management. TechM derives around 60% its revenue from Europe
and BT is its largest client.
Statement of Risk
Tech Mahindra derives all of its revenues from the telecom vertical. Any
slowdown in Telecom industry IT spend may adversely impact Tech Mahindra's
revenues. Tech Mahindra derives about 75% of revenues from it top two clients,
which exposes it to any adverse developments at the top clients. We believe that
lack of expertise beyond telecoms may limit cross-selling opportunities for the
company. Additional risks include currency risk, weakness in the global
economy and salary inflation.
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