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One-off quarter …
Tech Mahindra reported Q2FY11 revenues (excluding one-offs of Rs
~299 crore) of Rs 1235 crore (I-direct estimate: Rs 1208 crore) led by
4.5% volume growth. EBITDA margins improved 290 bps QoQ as F/X
tailwinds, utilisation benefit and SG&A improvement absorbed wage
inflation headwinds. Though EBITDA margins were ahead of our
expectation, a 6 percentage point (pp) improvement in utilisation
coupled with net head reduction (1260 employees) and ~30% attrition
rate suggests marginal headroom for operational efficiency, going
forward. Consequently, we have maintained our ADD rating with Rs 790
price target and prefer HCL Technologies to Tech Mahindra.
Operating highlights
BT’s revenues were flat QoQ at $113 million while non-BT revenues
have grown 9.5% QoQ to $151 million. Top 5 excluding top 1 client
have likely grown 24% QoQ while top 6-10 clients have declined 8%
QoQ. Geographically, the US contribution to revenues declined to
25% vs. 32% in Q1FY11 while the rest of world increased to 32%
from 13% in Q1FY11 due to the large contract signed in India.
EBITDA margins improved 290 bps QoQ. The company realised
one-time revenue of Rs 299 crore from customers and recorded an
equivalent of finance lease-receivables in the balance sheet,
realisable over 3.5 years. This would impact the cash flow. Finally,
Tech Mahindra’s utilisation improved by 6 pp QoQ and net
headcount reduced by 1260 employees.
Valuation
We have modestly adjusted our estimates to account for better-thanexpected
EBITDA margins sans adjustments for Mahindra Satyam. Thus,
we are modelling FY11E and FY12E EPS of Rs 48.2 (Rs 49.9 earlier) and
Rs 49.2 (Rs 48.8 earlier). However, we have not changed our price target
as Mahindra Satyam’s price has declined, which yields lower value for
Tech Mahindra’s holding in Mahindra Satyam.
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