Analysts give thumbs up to Tech Mahindra

Remain positive and expect further upsides for the stock as synergies from the Mahindra Satyam merger fructify

Tech Mahindra scrip has run-up six per cent in the past three trading sessions — outperforming both the Sensex and BSE IT indices, which grew by two to three per cent each in the same period — after the good results announced on Monday. The scrip has outperformed these indices since June 2012 on the back of strong deal wins, the Satyam merger completion and good inorganic growth.

Despite this run-up, current valuations of 11.4 times FY14 estimated earnings seem to be compelling, believe analysts. All 11 analysts polled by Bloomberg on August 13 have a ‘Buy’ rating on Tech Mahindra, with an average target price of Rs 1,480. This translates into a 12-per-cent upside from the current level of Rs 1,322.  

“Given Tech Mahindra's relatively large size and management quality, we consider this a solid stock and valuations look attractive. While the 48 per cent exposure to telecom is a concern, the company appears to be navigating this well by virtue of its scale and acquisitions. We revise target price to Rs 1,500 (from Rs 1,040),” says Anantha Narayan, IT analyst at Credit Suisse. He has upgraded the stock from ‘Neutral’ to ‘Outperform’ after the results. The strong show for the June 2013 quarter has led most analysts to raise their earnings estimates for the company.

“Tech Mahindra witnessed another good quarter. New deal signings lend comfort on sustainability. We raise FY14-16 earnings estimates by 22-25 per cent - majority of which is rupee driven and target price by 30 per cent to Rs 1,430. We expect organic revenue growth of 7.2 per cent in FY14,” says Kawaljeet Saluja, IT analyst at Kotak Institutional Equities.

The management remained confident on the growth, given the pick-up in discretionary spending and strong deal momentum in the US and some parts of Europe. The company has successfully managed to scale up revenues from non-telecom verticals and attain profitable growth. While revenues from its largest client, BT, continue to slide and non-BT clients are witnessing strong growth, aiding its growth prospects.

“Expanded offerings (after the merger and four acquisitions in FY13), and results from the new sales and large-deal teams now seem to benefiting Tech Mahindra. We believe improvements in the employee pyramid (28 per cent with less than three years’ experience), utilisation, low-margin accounts and BPO productivity could all add to margins and leave enough buffer to re-invest FX benefits for growth initiatives,” believes Abhiram Eleswarapu, IT analyst at BNP Paribas.

Strong traction in non-BT clients, healthy deal pipeline
Tech Mahindra's consolidated revenues grew 8.9 per cent sequentially to Rs 4,103 crore for the quarter ended June. This growth was led by strong traction in non-BT clients and consolidation of Mahindra Satyam (and smaller contribution from Complex IT) buy. Given that revenues from BT fell 1.6 per cent sequentially, this top line growth is pretty impressive. Though a weaker rupee aided the performance, constant currency revenue growth of 4.4 per cent too is good. Key verticals such as manufacturing, retail and media/technology each grew by five per cent plus, while telecom grew by two per cent. Thus, growth was broad-based. Amongst key geographies, Americas grew 11 per cent. However, Europe grew by 1.1 per cent and India business remained weak.

Positively, a weaker rupee offset pressures arising from lower Complex IT margins, higher visa costs and marginal fall in utilisation rates (by one percentage point to 76 per cent). Consequently, Ebitda margin expanded 60 basis points sequentially to 21.1 per cent. Net profit stood at Rs 686 crore, up 7.6 per cent sequentially and was boosted by forex gain of Rs 125 crore.  The company signed 12 deals in the quarter with three between $50-75 million (in revenues). The deal pipeline appears healthy and provides increased revenue visibility for Tech Mahindra, even as BT revenues could fall by 12 per cent this year, believe analysts.