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Revenue performance mixed: For 2QFY2011, Tech Mahindra reported revenues
of US $328.2mn, which includes US $63.8mn of one-time pass through revenues
from a managed services contract for procurement of hardware and software as
a part of a multi-year deal. Excluding this, revenues came in at US $264.4mn v/s
our estimate of US $268.1mn on the back of strong volume growth of 4.5% qoq
and rest due to better exchange realisation. Volume growth was primarily driven
by strong constant currency growth of 9.5% qoq in the non-BT accounts.
Margins surge: EBITDA margin surged by 298bp qoq to 21.7% (excluding the
one-off item) because of favourable cross-currency gain of 200bp, improved
utilisation and lower SG&A costs, which countered the effect of wage hikes given
to the offshore employees.
Outlook and Valuation: Going forward, we expect the company’s non-BT
business to be the growth driver and register 6% CQGR revenue growth over
2QFY2011-4QFY2012E. However, BT is expected to clock flat revenues.
Nonetheless, we expect overall revenues (in dollar terms) to record 12% CAGR
over FY2010-12. At the CMP, the stock is trading at 7.5x FY2012E EPS of `55.1
excluding the value of Mahindra Satyam stake. On SOTP basis, we have valued
the company at a PE of 12x (i.e. at 45% discount to Infosys target multiple of 22x
and in line with its three-year historical average) on a standalone basis and
added the company’s 42.7% stake in Satyam with a holding discount of 15% at
the CMP, arriving at a Target Price of `941. We maintain a Buy on the stock.
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