Tech Mahindra (Update) : Scaling new heights. Maintain BUY :: HDFC Sec, link

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Scaling new heights
Tech Mahindra has had a phenomenal run on the
bourses, generating a whopping 59% return over the
trailing year. Growth leadership (USD revenue
growth at 17.7/17.9% for FY14/FY15E) driven by
large deal wins and bolt-on acquisitions has enabled
a steady P/E re-rating for the stock. Tech M currently
trades at 17.2x one year forward earnings vs. 12.8x a
year ago. We model 15.5% USD revenue CAGR (FY14-
FY17E) aided by ramp up of large deals (BASE,
Bombardier, Volvo) as well as increased client
mining. Tech M currently trades at a 10% premium to
HCL Tech owing to superior USD revenue growth
(18% for Tech M vs. 12% for HCL Tech for FY15E).
Rolling over to FY17E, we increase our TP by 5.5% to
Rs 2,808/sh (15x FY17E EPS). Retain BUY.
 Focus on Scaling Revenues : Tech M has an
aspiration of clocking annual revenues of USD 5bn,
with a target of achieving quarterly revenues of USD
1,250mn by 3QFY16. Tech M reported revenues of USD
900mn for 2QFY15. Hence, Tech M would require a
6.8% CQGR over the next five quarters to achieve its
target for 3QFY16. We believe that Tech M’s revenues
would reach USD 4.78bn by FY17E (vs. USD 3.09bn in
FY14), a 15.5% CAGR (FY14-FY17E). Large deal wins
(BASE, Bombardier, Volvo) coupled with new logo
additions could drive growth trajectory. M&A could be
an added catalyst.
 Scale to aid margin expansion : HCL Tech has
suffered margin weakness during FY10-FY12, owing to
a ramp-up of its large deal wins, won during the
recession period (CY09). However, learning curve in
implementing these large deals, improvement in
utilization rates and SG&A leverage have enabled
steady margin expansion over FY12-FY15E. We believe
Tech M’s business trajectory in the current scenario
appears to be similar to that of HCL Tech. Large deal
wins, transition costs, onsite expansion and robust
hiring have weighed on Tech M’s margins for FY15E.
We expect Tech M’s FY15 EBIDTA margin at 19.4%, a
drop of 280 bps YoY. Tech M’s EBIDTA margins would
be ~560bps lower than that of HCL Tech (~25%). We
see scope for margin expansion at Tech M over a
three-five year period. This could be a key catalyst for
EPS upgrades.
 FCF to improve over the coming period : Tech M’s
FCF/EBIDTA stood at 13% for FY14, which is below
peers(~40-50%). Higher debtor days (debtors including
unbilled at 102 for 2QFY15) coupled with a portion of
deferred revenues in BT contracts till 4QFY14 (non cash
flow entry) have weighed on FCF. With the completion
deferred revenue component of BT contract and scope
for improvement in the working capital cycle, we see
improvement in FCF in FY15E. We rollover to FY17 and
upgrade our TP by 5.5% to Rs 2,808/sh (15x FY17E
EPS). Maintain BUY.


LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3009887