Solid beat… • Tech Mahindra :: ICICI Securities,

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Solid beat…
• Tech Mahindra reported robust Q2FY15 earnings as reported dollar
revenue growth was above our and consensus estimate
• US$ revenues grew 5.2% QoQ to $900 million, above our 3.5% QoQ
growth and $885 million estimate
• At 20.0%, EBITDA margins improved 187 bps QoQ and were in line
with our 20.2% estimate led by utilisation improvement, SG&A
leverage, revenue growth and f/x. Reported PAT of | 720 crore was
also in line with our | 724 crore estimate
On track to achieve industry leading growth in FY15E…
TechM reported a robust Q2 led by growth across communication,
manufacturing & retail verticals and ramp up in top accounts. The
commentary suggests the demand environment continues to be healthy
across geographies (except Europe) and verticals. The deal pipeline
continues to be healthy (~$1.3 billion TCV wins in the past six quarters),
while large deal ramp-ups (Bombardier, Ahlstrom), acquisitions (BASF IT)
and approximately half year integration of Mahindra Engineering Services
(MES) could help achieve industry leading growth. TechM continues to
see good traction in the network services segment and large deal wins in
telecom and enterprise (three signed in manufacturing, pursuing eight to
10) space. Noticeably, TechM could beat the top end of the Nasscom
guidance (13-15%) despite flat quarterly growth in Q3 and Q4FY15E.
Margins in line with estimates…
At 20%, EBITDA margins improved 187 bps QoQ and were in line with
our 20.2% estimate primarily led by utilisation improvement, SG&A
leverage, revenue growth and f/x. However, the Q2 margin profile was
lower than 22.2% reported in FY14 – which improved 83 bps YoY (FY13
adjusted for Satyam) led by currency tailwinds and mix change partially
offset by wage hikes, lower BT amortisation and large deal transition
costs – and FY08-14 average of 22%. That said, the margin improvement
could likely continue during H2FY15E as pyramid corrects and utilisation
improves though Q4 margins could be impacted by wage hikes. We
expect margins to decline 274 bps to 19.5% in FY15E led by business
reinvestments, large deal transition costs and wage hikes (Q4).
Client metric shows healthy uptick…
TechM added 17 active clients in the quarter while adding one and seven
clients to >$50 million and $5-10 million buckets, respectively. Client
mining continues to see uptick as revenue/client stood at $1.39 million vs.
$1.35 million in Q1 and FY12-14 average of $1.33 million. Recall, during
FY14, TechM added 34 customers to >$1 million revenue run-rate and
five, 10, three and two customers to >$5 million, >$10 million, >$20
million and >$50 million bucket, respectively. Top 5 customer revenues
grew 32% YoY ($44 million incremental revenue contribution vs. $45
million for company) and were above the company average (18.7% for
Q2) despite weakness in top client. On a standalone basis, the company
has added 15 customers to >$1 million run-rate during FY09-13.
Growth momentum likely to continue; maintain BUY
We expect TechM to report revenue, earnings CAGR of 16%, 10% in
FY14-16E (average 16.5% EBITDA margins in FY15-16E), vs. 13%, 19%
reported in FY08-13 (average 21.9%), respectively, driven by order
bookings & large deal ramp-ups. We now value TechM at 15.5x its FY16E
EPS of | 170 and revise our target price to | 2630 vs. | 2450 earlier.