Excellent print despite seasonal weakness… • Tech Mahindra :: ICICI Securities, report

Please Share::

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->
Excellent print despite seasonal weakness… • Tech Mahindra reported earnings in line with our Q3FY15 estimates • US$ revenues grew 2.7% QoQ to $924.3 million, in line with our 2.8% QoQ growth and $925 million estimate • At 20.2%, EBITDA margins improved 18 bps QoQ and were in line with our 20.5% estimate. Reported PAT of | 805 crore was above our | 778 crore estimate led by one-time special adjustment of | 28.5 crore related to MES profits for H1FY15 Reports strong constant currency growth in Q3… TechM reported robust 4.9% constant currency (CC) growth in Q3 led by manufacturing, Europe offset by softness in telecom and de-growth in top 5 customers. 3.7% CC growth excluding MES contribution (~$10 million, ~1.2%) was also healthy in a seasonally soft quarter. Generally, earnings commentary suggests the demand environment across geographies & verticals, and deal pipeline continues to be encouraging. TechM signed deals worth ~$1.9 billion in TCV in the past seven quarters as it continues to see good traction in the network services segment and is getting invited to larger deals, than earlier, on enterprise side. Acquisition contribution in Q4 leads to a modest raise in FY15E estimates. Margins generally in line with estimates… At 20.2%, EBITDA margins improved a modest 18 bps QoQ and were below our 20.5% (49 bps improvement) estimate despite rupee related tailwinds and 200 bps improvement in utilisation ex-trainees to 78%, likely impacted by rising SG&A spends (increased 30 bps QoQ to 14.4% of revenues) and MES integration costs. Further, the Q3 margin profile was lower than 22.2% reported in FY14 – which had improved 83 bps YoY (FY13 adjusted for Satyam) led by currency tailwinds and mix change partially offset by wage hikes, lower BT amortisation and large deal transition costs – and FY08-14 average of 22%. Finally, average 7% offshore and 2% onshore wage hikes could impact Q4 margins by ~200 bps but could be partially offset by improving operating metrics such as utilisation, offshoring, pyramid. We expect margins to decline 322 bps to 19% in FY15E led by reinvestments, transition costs and wage hikes (Q4). Client additions continue to be healthy… During the quarter, active clients rose by 25 to 674 while $1 million+, $5 million+ category saw additions of seven and one client, respectively. Client mining moderated during Q3 as revenue/client stood at $1.37 million vs. $1.39 million in Q2 but continues to be better than FY12-14 average of $1.33 million. Recall, during FY14, TechM added 34 customers to >$1 million revenue run-rate and five, ten, three and two customers to >$5 million, >$10 million, >$20 million and >$50 million category, respectively. Top 5 customer revenues de-grew 5% QoQ vs. 6.1% CQGR during Q1FY14-Q2FY15 while top 6-10 customer revenues picked up (12% QoQ growth) after a sharp decline in Q2 (-11%). Raising target price as growth momentum likely to continue… We expect TechM to report rupee revenue, PAT CAGR of 20%, 13% in FY14-17E (average 19.3% EBITDA margins in FY15-17E), vs. 13%, 19% reported in FY08-13 (average 21.9%), respectively, driven by traction in enterprise and communications business, healthy order pipeline and large deal ramp-ups. We now value TechM at 16.5x its FY17E EPS of | 197 vs. 17x FY16E earlier and raise the target price to | 3250 vs. | 2900 earlier. The lower multiple is to account for longer time horizon.

LINK
http://content.icicidirect.com/mailimages/IDirect_TechM_Q3FY15.pdf