Nomura | Tech Mahindra ::Still more pain left in BT business

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Nomura | Tech Mahindra
Still more pain left in BT business

TECHM 3QFY12: Revenue and margins below expectations
 TechM reported a US$ revenue decline of 2.5% q-q – which was
worse than our expectation of 0.6% decline. The decline was driven by
~8% q-q decline in BT business (on the back of ~6% in 2Q).Non-BT
business had a muted quarter, with 0.6% q-q growth.
 EBITDA margin improvement of 90bps q-q was below our expectation
(of 150bps). The margin improvement of 90bps was despite 11% q-q
gain in USD/INR realized rate, (our expectation of 150bps was based
on 9% q-q improvement in USD/INR assumption) and appears to be
the result of pricing cuts in BT business along with increasing skew of
business towards BPO.
 PAT excluding Satyam contribution at INR14.4bn was ahead of our
expectation (of INR13.3bn) on account of other income gains and
lower taxation (16.7% tax rate against 23% expected).
Maintain Reduce; our TP of INR580 implies 11% downside
 The 3Q result reinforces our weak near-term revenue and margin
outlook for the company given 1) more revenue and margin pain likely
in BT business (35% of revenues), 2) an anaemic outlook for
discretionary spending in Telecom; and 3) an increasing skew in
TechM’s business mix towards the low-margin BPO/emerging markets
business.
 Upsides from Mahindra Satyam (SCS IN, Not rated) where TechM has
~43% ownership also look unlikely in our view post its weak 3Q result.
Satyam reported weaker than expected revenue growth (of 1.6% q-q
decline) in 3Q. Margins at Satyam are likely to decline going ahead, in
our view, given the sharp rupee appreciation against the USD in the
quarter-to-date (spot 8% higher vs 3QFY11 closing rate) and limited
operating levers left.
 TechM has run-up by 8% over the last month, outperforming the
CNXIT index by 6%. We see significant downside to the stock at
current levels and reiterate our Reduce rating on Tech M. Our target
price of INR580 implies ~11% downside.
BT retendering to close by 1QFY13; still more pain left
Management expects the retendering of business at BT to come to a
close by 1QFY13. In the bidding that has happened so far, Tech M has
retained its market share according to management. However, the
company still sees headwinds to revenue and margins from the BT
business in the near term.
Muted activity in Europe; demand revival seen in US
Decision making is taking longer and clients are more cautious in
spending, according to management. They expect activity to remain
Tech Mahindra