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UBS Investment Research
Tech Mahindra
Uncertainty to weigh on the stock
[ EXTRACT]
Top client British Telecom likely to remain a drag on revenue
Tech Mahindra’s (TechM) top client British Telecom (40% of revenue) has put
significant pieces of business out for tender, according to management. We think
this could impact revenue growth in the near term and pose a risk to current
management expectations of quarterly revenue of £70–72m from British Telecom
in FY12.
Emerging markets likely to grow well, but margins likely to be lower
TechM’s operating margin has remained relatively lacklustre, which we attribute to
the company’s higher emerging market exposure (18% of revenue in FY11 from
8% in FY09) some of which is in ramp up mode. We expect emerging markets to
continue to drive IT services growth, but dilute the company’s margin profile.
Delay in Satyam turnaround could impact profits
The earnings surprise in Q1 FY12 was due to the ongoing turnaround at Mahindra
Satyam (Satyam), in which TechM has a 42% stake. We think the turnaround at
Satyam could be delayed due to demand headwinds, impacting TechM’s current
profit estimates. We revise our FY12/13/14 EPS estimates from
Rs67.06/73.38/85.90 to Rs75.24/71.50/80.41.
Valuation: Downgrade to Sell, lower price target from Rs780 to Rs630
We downgrade our rating from Neutral to Sell on revenue concerns due to British
Telecom. We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. We assume a 12.7%
WACC and 3% terminal growth.
Tech Mahindra
Tech Mahindra (TechM) is an IT services company catering to the global
telecommunications industry. It is joint venture between Mahindra Group and
British Telecommunications. TechM's service offerings include application
development and maintenance, business process outsourcing (BPO) and
infrastructure management. TechM derives around 60% its revenue from Europe
and BT is its largest client.
Statement of Risk
Tech Mahindra derives all of its revenues from the telecom vertical. Any
slowdown in Telecom industry IT spend may adversely impact Tech Mahindra's
revenues. Tech Mahindra derives about 75% of revenues from it top two clients,
which exposes it to any adverse developments at the top clients. We believe that
lack of expertise beyond telecoms may limit cross-selling opportunities for the
company. Additional risks include currency risk, weakness in the global
economy and salary inflation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Tech Mahindra
Uncertainty to weigh on the stock
[ EXTRACT]
Top client British Telecom likely to remain a drag on revenue
Tech Mahindra’s (TechM) top client British Telecom (40% of revenue) has put
significant pieces of business out for tender, according to management. We think
this could impact revenue growth in the near term and pose a risk to current
management expectations of quarterly revenue of £70–72m from British Telecom
in FY12.
Emerging markets likely to grow well, but margins likely to be lower
TechM’s operating margin has remained relatively lacklustre, which we attribute to
the company’s higher emerging market exposure (18% of revenue in FY11 from
8% in FY09) some of which is in ramp up mode. We expect emerging markets to
continue to drive IT services growth, but dilute the company’s margin profile.
Delay in Satyam turnaround could impact profits
The earnings surprise in Q1 FY12 was due to the ongoing turnaround at Mahindra
Satyam (Satyam), in which TechM has a 42% stake. We think the turnaround at
Satyam could be delayed due to demand headwinds, impacting TechM’s current
profit estimates. We revise our FY12/13/14 EPS estimates from
Rs67.06/73.38/85.90 to Rs75.24/71.50/80.41.
Valuation: Downgrade to Sell, lower price target from Rs780 to Rs630
We downgrade our rating from Neutral to Sell on revenue concerns due to British
Telecom. We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. We assume a 12.7%
WACC and 3% terminal growth.
Tech Mahindra
Tech Mahindra (TechM) is an IT services company catering to the global
telecommunications industry. It is joint venture between Mahindra Group and
British Telecommunications. TechM's service offerings include application
development and maintenance, business process outsourcing (BPO) and
infrastructure management. TechM derives around 60% its revenue from Europe
and BT is its largest client.
Statement of Risk
Tech Mahindra derives all of its revenues from the telecom vertical. Any
slowdown in Telecom industry IT spend may adversely impact Tech Mahindra's
revenues. Tech Mahindra derives about 75% of revenues from it top two clients,
which exposes it to any adverse developments at the top clients. We believe that
lack of expertise beyond telecoms may limit cross-selling opportunities for the
company. Additional risks include currency risk, weakness in the global
economy and salary inflation.
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