Steady perfomance continues Tech Mahindra: HDFC Securities

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Steady perfomance continues Tech Mahindra’s 3QFY15 results were inline with our estimates on USD revenues and EBIDTA margin. APAT was 3% below our estimates owing to lower other income. Tech M continues to deliver steady growth amongst Tier 1 IT vendors. For 3QFY15, company delivered 4.9% QoQ growth in constant currency (3.5% organic and the rest owing to Mahindra Engineering Services consolidation).TCS/Infosys/Wipro/HCL Tech delivered 2.5/2.6/3.7/6.2% QoQ growth in cc for 3QFY15. Management guided for continued deal wins across verticals which are key positive. We expect Tech M to deliver ~17.2% USD revenue growth for FY15 which is ahead of Tier 1 peers. Assuming the consolidation of Lightbridge and SoftGen, we believe Tech M could deliver ~27% USD revenue growth in FY16. Hence, we believe the company would continue to enjoy growth leadership in the medium term and subsequently enjoy premium multiples. Tech M currently trades at a 15% premium to HCL Tech. Our TP is revised upwards by 7% to Rs 3,016/sh (16x FY17E EPS). Maintain BUY.  3QFY15 Highlights : Tech Mahindra reported revenues of USD 924mn, up 2.6% QoQ and inline with our estimates. Organic growth for the quarter was 1.5% and the rest was owing to MES Integration. EBIDTA margin at 20.2% was up 20bps QoQ and in-line with our estimates. Tech Mahindra would give wage hikes effective 4QFY15 which would be a margin headwind. APAT of Rs 7.7bn was 3.2% below our estimates owing to lower other income.  View : Tech M’s growth in FY15 is predominantly driven by higher traction in the telecom vertical. We expect telecom vertical (51% of total revenues) to grow at 22% YoY in FY15 driven by a ramp-up in Managed Services contracts. We believe that this trend is likely to continue in FY16 as well, led by consolidation of the Lightbridge acquisition. However, recent deal wins in Enterprise verticals could aid acceleration in growth in this segment as well. Tech M’s EBIDTA margins at ~19.1% for FY15E are below Tier 1 IT peers (HCL Tech’s FY15E EBIDTA margin at ~25%). We believe that margins would remain under pressure led by consolidation of LightBridge and Softgen. However, accelerated growth trajectory and improving scale leads us to retain positive stance. Maintain BUY.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011087