Tech Mahindra-Reduce target price post Satyam results; REDUCE.: Kotak Sec

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Tech Mahindra (TECHM)
Technology
Reduce target price post Satyam results; retain REDUCE. We reduce our end-
FY2012E target price for TM to Rs720/share (Rs760 earlier) post our change in fair value
estimate for Mahindra Satyam. We reduce our fair value estimate for MS to Rs70/share
(Rs80 earlier) post 1Q/2QFY11 results. TM consolidated (with MS) EPS for FY2011E/12E
works out to Rs62/Rs65.4, respectively. TM will likely trade on merger ratio speculation
in the near term, in our view; we retain our REDUCE rating on fundamentals.




Reduce target price to Rs720/share (from Rs760) post Satyam 1Q/2QFY11 results
We revise our target price on TM to Rs720/share from Rs760 earlier. The change in target price is
entirely due to change in our fair value estimate for Mahindra Satyam to Rs70/share from
Rs80/share earlier. Our target price of Rs720/share comprises
􀁠 Rs377/share fair value estimate for the core business. We value TM’s core business based on a
PE multiple of 10X FY2012E adjusted EPS of Rs37.7/share. We adjust our EPS estimate for the
deferred revenues being booked for the Rs9.7 bn payout received from BT, being recognized at
the revenue line (for 19 quarters, starting 1QFY10).
􀁠 Rs74/share for the cash received from BT.
􀁠 Rs268/share from TM’s 42.7% stake in MS. This is based on our fair value estimate of
Rs70/share for MS. Our EPS estimates for Mahindra Satyam are Rs2.7 and Rs4.1 for FY2011E
and FY2012E, respectively.


Non-BT revenues improving, flat BT revenues and likely pressure on margins keep us cautious
Non-BT revenues have been improving with a strong 8.5% qoq growth in US$ terms from TM’s
non-BT accounts in Sep 2010 quarter and we expect the strength to sustain in the coming
quarters. However, flat to marginal increase in BT revenues (~43% of TM’s total revenues) is drag
on the overall revenue growth rate. We have been positive on non-BT revenue growth potential
for TM. Our positive stance is on the back of return of telco capex cycle across countries. We also
expect pressure on margins for Tech Mahindra due to multiple headwinds like (1) challenging
supply-side situation in the industry – TM with a high attrition rate of ~30% could face wage
pressure ahead; (2) Re appreciation and (3) impact of recent margin-dilutive deals (in our view).
Our consolidated EPS for Tech M stands at Rs62 and Rs65.4 (Rs71.1 and Rs70.4 earlier) for
FY2011E/12E, respectively. Retain REDUCE on the stock. Stock is likely to trade on Satyam-TM
merger ratio speculation in the near term.