Tech Mahindra: Weak near term largely priced in Retain faith on medium-term revenue/EPS growth and reasonable valuations: Nomura Research

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Action: Near-term growth hiccup largely priced in; maintain Buy

After our interaction with management, we sense caution on near-term growth

and margins at TECHM. Accordingly, we trim our organic USD revenue CAGR

to 11.5% over FY15-17F (a reduction of 2pp vs. earlier) while our EBITDA

margin estimates are lower by ~30bps each to ~18.5% for FY6/17F. However,

we believe the correction of 11% over the past one month has priced in the

near-term growth hiccups to a large extent and valuation of ~14x FY17F P/E

appears reasonable given our estimate of 18% EPS CAGR over FY15-17F.

We remain comfortable with our 16% USD revenue growth CAGR estimate

(11.5% organic) for FY15-17F, as we believe TECHM benefits from: 1) market

share gains in telecom, with possibilities of upsides from telecom M&A

integration; and 2) better participation in enterprise segment deal flow. We

retain Buy on TECHM but still prefer HCLT (HCLT IN, Buy) and TCS (TCS IN,

Buy) on higher growth sustainability.

Catalyst: Consistent growth across enterprise and telecom

4QF: Weak quarter with material margin declines

For 4QF, we expect USD revenue decline of 2.3% q-q (constant currency

growth of 0.3%) and 270bps q-q decline in EBITDA margin to 17.5% on

account of impacts from cross currency, wage hikes and LCC acquisition.

Management guidance on telecom growth in the near term after a likely weak

4QF, enterprise segment deal pipeline, and margin outlook will be keenly

watched.

FY16/17F EPS cut by ~6% each; TP reduces to INR720

We incorporate cross currency impact, weaker organic revenues and higher

contribution from LCC/Sofgen in 4QF (USD92mn vs. USD58mn earlier). Our

FY16F revenue run-rate assumptions for LCC/Sofgen remain unchanged at

USD452/52mn, respectively. Our TP reduces to INR720 (vs. INR761 earlier)

and is based on 16x FY17F EPS of INR44.8 (methodology unchanged).