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Tech Mahindra (TECHM)
Technology
Core business outlook weak. TM’s reported 2QFY12 EBITDA of Rs2 bn (-23.8% yoy,
-15.6% qoq) missed our estimate by 13.4%. Revenues of US$296.2 mn also missed our
estimate with non-BT growth neutralized by decline in BT revenues. EBITDA margin
declined 340 bps qoq to 15.3% on wage revision and transition costs of BPO contracts.
Outlook is bleak as BT business re-tendering and rate pressure will likely hurt revenues,
profitability and net income. Maintain SELL with SOTP-based TP of Rs600.
Weak quarter; margin declines significantly
TM’s 2QFY12 reported standalone net income (ex-Satyam) of Rs1.4 bn was 21.5% lower than our
estimate. Net income miss was contributed by 13.4% EBITDA miss and 52% qoq jump in
depreciation charge. Revenues grew 2.2% qoq to US$296.2 mn; growth of 6.9% qoq in non-BT
business was neutralized by 4.9% decline in BT revenues to US$110 mn. EBITDA margin declined
340 bps qoq to 15.3%. Decline was contributed by (1) low single-digit onsite and low double-digit
offshore wage revision and (2) decline in PBIT of the BPO segment; we believe there could be oneoff
and transition costs related of a large BPO project. Consolidated net income (includes share of
profits from Mahindra Satyam) of Rs2.4 bn was 9.3% lower than our estimate of Rs2.65 bn.
Contraction in BT’s IT budget hurts 2QFY12 revenues; retendering to impact 2H revenues
BT business declined 4.9% qoq to US$109.6 mn. We believe that the revenue decline for the
quarter could have been on account of cut in BT’s IT budgets. We note that BT has started the
process of re-tendering the IT outsourcing portfolio handled by all vendors for various BT
businesses. We would not be surprised if revenues or profitability or both declines over the next 12
months. TM management has not guided for any revenue range from BT though it indicate that
margins may decline in the near term.
Weak outlook for growth and profitability (ex-currency)
TM has done a credible job in growing non-BT business; in fact, revenue CQGR was 5.6% over the
last four quarters. Non-BT business now contributes 63% of overall revenues. However, BT may
drag overall revenue growth. Margins, even if it improves from 2QFY12 levels, may stay under
pressure due to pricing pressure and shift in mix of revenue to relatively low-margin geographies.
SELL with unchanged target price of Rs600
Even as our consolidated EPS estimates for FY2012/13E go up by 4.3/6.0% to Rs75.2/80 due to
Rupee depreciation and change to Satyam EPS estimates, we maintain our target price on TM at
Rs600/share as we lower the target multiple assigned to normalized standalone FY2013E earnings.
SELL.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tech Mahindra (TECHM)
Technology
Core business outlook weak. TM’s reported 2QFY12 EBITDA of Rs2 bn (-23.8% yoy,
-15.6% qoq) missed our estimate by 13.4%. Revenues of US$296.2 mn also missed our
estimate with non-BT growth neutralized by decline in BT revenues. EBITDA margin
declined 340 bps qoq to 15.3% on wage revision and transition costs of BPO contracts.
Outlook is bleak as BT business re-tendering and rate pressure will likely hurt revenues,
profitability and net income. Maintain SELL with SOTP-based TP of Rs600.
Weak quarter; margin declines significantly
TM’s 2QFY12 reported standalone net income (ex-Satyam) of Rs1.4 bn was 21.5% lower than our
estimate. Net income miss was contributed by 13.4% EBITDA miss and 52% qoq jump in
depreciation charge. Revenues grew 2.2% qoq to US$296.2 mn; growth of 6.9% qoq in non-BT
business was neutralized by 4.9% decline in BT revenues to US$110 mn. EBITDA margin declined
340 bps qoq to 15.3%. Decline was contributed by (1) low single-digit onsite and low double-digit
offshore wage revision and (2) decline in PBIT of the BPO segment; we believe there could be oneoff
and transition costs related of a large BPO project. Consolidated net income (includes share of
profits from Mahindra Satyam) of Rs2.4 bn was 9.3% lower than our estimate of Rs2.65 bn.
Contraction in BT’s IT budget hurts 2QFY12 revenues; retendering to impact 2H revenues
BT business declined 4.9% qoq to US$109.6 mn. We believe that the revenue decline for the
quarter could have been on account of cut in BT’s IT budgets. We note that BT has started the
process of re-tendering the IT outsourcing portfolio handled by all vendors for various BT
businesses. We would not be surprised if revenues or profitability or both declines over the next 12
months. TM management has not guided for any revenue range from BT though it indicate that
margins may decline in the near term.
Weak outlook for growth and profitability (ex-currency)
TM has done a credible job in growing non-BT business; in fact, revenue CQGR was 5.6% over the
last four quarters. Non-BT business now contributes 63% of overall revenues. However, BT may
drag overall revenue growth. Margins, even if it improves from 2QFY12 levels, may stay under
pressure due to pricing pressure and shift in mix of revenue to relatively low-margin geographies.
SELL with unchanged target price of Rs600
Even as our consolidated EPS estimates for FY2012/13E go up by 4.3/6.0% to Rs75.2/80 due to
Rupee depreciation and change to Satyam EPS estimates, we maintain our target price on TM at
Rs600/share as we lower the target multiple assigned to normalized standalone FY2013E earnings.
SELL.
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