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Sharp drop in margins and weak outlook at BT
Fear of sharp cuts in BT revenues plays out earlier than anticipated
Action: 5% q-q decline in BT & more likely to come; maintain Reduce
Revenue from BT declined by 5% q-q in 2QFY12 on account of project
closures. There appears to be severe pricing pressure in the BT
business, as management has indicated that both revenue and margin
would be impacted in the near-term despite Tech Mahindra having
retained large portions of its business and gaining market share in the
re-tendering process. We were earlier anticipating a ~10% decline in BT
revenues in FY13F – which we now expect will occur in FY12F.
2Q results were disappointing operationally as the margin decline of
340bps q-q was sharper than our expectation. We maintain our Reduce
on Tech Mahindra on account of 1) a weak near-term revenue and
margin outlook; 2) the absence of a pickup in discretionary spending in
Telecom; and 3) increasing skew in TechM’s business mix towards the
low-margin BPO/emerging markets business.
Valuation: Cutting multiple to10x; TP reduced to INR580
We cut our TechM standalone EPS estimates by 21%/5% in FY12F/13F
on account of an earlier-than-anticipated drop in BT revenues. Our FY13F
EPS estimates are marginally higher on increased Satyam contribution
stemming from the 2Q outperformance and a better margin outlook. We
reduce our valuation multiple to 10x FY13F (from 11x) on 1) balance sheet
deterioration; and 2) the likelihood of sustained margin pressure due to
skew in the business mix. Our TP declines to INR580 (from INR620).
Catalyst: Sharper declines in BT business and no pickup in
discretionary demand
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sharp drop in margins and weak outlook at BT
Fear of sharp cuts in BT revenues plays out earlier than anticipated
Action: 5% q-q decline in BT & more likely to come; maintain Reduce
Revenue from BT declined by 5% q-q in 2QFY12 on account of project
closures. There appears to be severe pricing pressure in the BT
business, as management has indicated that both revenue and margin
would be impacted in the near-term despite Tech Mahindra having
retained large portions of its business and gaining market share in the
re-tendering process. We were earlier anticipating a ~10% decline in BT
revenues in FY13F – which we now expect will occur in FY12F.
2Q results were disappointing operationally as the margin decline of
340bps q-q was sharper than our expectation. We maintain our Reduce
on Tech Mahindra on account of 1) a weak near-term revenue and
margin outlook; 2) the absence of a pickup in discretionary spending in
Telecom; and 3) increasing skew in TechM’s business mix towards the
low-margin BPO/emerging markets business.
Valuation: Cutting multiple to10x; TP reduced to INR580
We cut our TechM standalone EPS estimates by 21%/5% in FY12F/13F
on account of an earlier-than-anticipated drop in BT revenues. Our FY13F
EPS estimates are marginally higher on increased Satyam contribution
stemming from the 2Q outperformance and a better margin outlook. We
reduce our valuation multiple to 10x FY13F (from 11x) on 1) balance sheet
deterioration; and 2) the likelihood of sustained margin pressure due to
skew in the business mix. Our TP declines to INR580 (from INR620).
Catalyst: Sharper declines in BT business and no pickup in
discretionary demand
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