The combined entity of Tech Mahindra (TECHM) and Mahindra Satyam
(MSAT) will be the fifth largest IT service provider based out of India with
revenues in excess of USD2.5bn and margins in high teens. We believe that
this entity will emerge as a strong contender in the current vendor
consolidation environment with a diversified practice across service lines, a
huge talent base and significant client relationships. The above merger will
also open up newer opportunities for the company in bids where minimum
past execution records are a must. We initiate coverage on TECHM with a
post merger revenue growth of 7%/9% for FY13/FY14 respectively and with
a target price of INR1,005, implying 12x our FY14E EPS estimate of INR83.7.
Tech Mahindra + Mahindra Satyam = A formidable combination
The merger of MSAT with TECHM creates a formidable player with TECHM’s and MSAT’s
client base of 130 and 372 respectively, implying a client base of 500, which is similar to
Tier I companies. This, combined with TECHM’s impressive top client mining capabilities,
(avg. Top 10 client realisation is ~USD91mn) opens up a plethora of opportunity for the
combined entity to increase the wallet share among a large base of clients. This will
enable significant operational synergies leading to improvement in margin.
Diversification, high non-BT growth key
TECHM on a standalone basis derives about 96% of revenues from telecom. Post the
merger, the contribution of telecom will come down to 45%. Also, the geographical
concentration of Europe in TECHM reduces from 45% to 35% for the combined entity.
Moreover, TECHM specialized telecom play has resulted in a robust growth for the
company in non-BT clients which is encouraging under current environment.
Outlook and valuations: Strong turnaround; initiate with ‘BUY’
Given the significant margin performance by MSAT in the last few quarters (from 5.9% in
Q211 to 21.7% in Q1FY13) combined with a modest growth by TECHM amidst uncertainty
in telecom vertical gives us the comfort to forecast a revenue growth of 7%/9% for
FY13E/FY14E respectively. Based on the above and coupled with a reduced client and
geographical concentration, we value the company at 12x, FY14E earnings (merged
entity) of INR83.7. We initiate coverage on TECHM with ‘BUY/Sector Outperformer’
recommendation/ rating and a 12-month target price of INR1,005.
No comments:
Post a Comment