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The telecom sector across the world is in a recovery mode, with information technology (IT) spends in that segment reviving at a reasonable pace.
This is evidenced by the fact that the two-three top IT players have seen the telecom verticals grow and increase contribution to revenues after a prolonged lull.
In this regard, Tech Mahindra, a software provider focussed exclusively on the telecom sector, has seen a significant recovery in client spends and has been able to diversify and grow its customer base.
Momentum in large-client additions, a favourable geographic-mix and significant synergies from the eventual merger of Satyam Computer with itself are key positives for the company. Tech Mahindra has also made two significant acquisitions with Hutchison Global Services and Comviva, which are likely to improve revenue visibility and broaden client base.
At Rs 906, the share trades at nine times its likely per share earnings (incorporating the Satyam merger) for FY14.
This valuation places it a discount to most top-tier IT players that trade at 12-15 times, making it an attractive option for investors with a two-year horizon. The valuations are at or even lower than some mid-tier software players making it a reasonable entry point.
TELECOM REVIVAL
Tech Mahindra’s dependence on BT, its largest client, has been coming down steadily from more than 50 per cent of revenues a couple of years earlier to 33 per cent currently. Other clients grew at an impressive pace to diversify and strengthen the company’s customer base.
Client additions of the larger sizes ($15-50 million) too have been steady.
The company has a desirable geographic-mix with a blend of mature and emerging markets.
The US accounts for 33 per cent of revenues, Europe 46 per cent and rest of the world (that includes markets such as Australia, West Asia and India) make up the balance.
With telecom spending reviving among customers due to worldwide increase in usage of data and smartphones necessitating network and software updates, players such as Tech Mahindra are well positioned to take advantage of this demand. The company acquired global telecom operator Hutchison’s captive customer care unit, Hutchison Global Services, for $87 million in September this year.
As a result of this acquisition, Tech Mahindra is expected to get $850 million in revenues over a five year period. On an annualised basis, this would translate to more than 12 per cent of Tech Mahindra’s full year revenues.
Of course, this deal will mean taking over 11,500 employees of Hutchison Global to its fold, which can escalate costs, but the management expects the deal to be earnings accretive.
SATYAM SYNERGIES
Another key inorganic move by the company has been buying a 51 per cent stake in value-added services provider Comviva, which counts several local and international mobile operators among its customers.
Through these moves, Tech Mahindra would move closer to being able to serve the entire telecom software value chain.
Satyam Computer (now Mahindra Satyam) has well and truly revived over the past 12-18 months and is growing at or faster than the industry.
After recording growth in key financials in FY12, the momentum has continued into the current fiscal as well.
In the first half of this fiscal, Satyam’s revenues grew by 26.8 per cent over the same period in 2011-12 to Rs 3818.2 crore, while net profits rose 36 per cent to Rs 630.2 crore.
Its key verticals such as manufacturing, BFSI and retail are growing faster than the overall company rate. Large deal wins have come through consistently and its top clients have expanded contribution to revenues.
Becoming cash-healthy (Rs 3,062 crore as on September 2012) so early into its turnaround is another key factor in its favour.
With improvements in key performance parameters, Satyam will be a scale and capabilities enhancing addition for Tech Mahindra.
The combined entity would be able to bid for large deals ($100 million plus) in the future and compete with the top-tier IT players.
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