Tech Mahindra Ltd (Q4 FY14)

India Infoline News Service | Mumbai |

Industry-leading growth continues; FY15 likely to be a repeat of FY14

Rs1,838, Target Rs2,250, Upside 22.4%

  • Industry-leading growth continues; FY15 likely to be a repeat of FY14
  • Growth was more concentrated in nature during Q4 FY14; employee addition was robust 
  • OPM decline was higher than expected; outlook steady
  • Inexpensive valuation to provide comfort in the event of further rupee appreciation
Result table
(Rs mn) Q4 FY14 Q3 FY14 % qoq Q4 FY13 % yoy
Net sales 50,581 48,985 3.3 37,673 34.3
Operating profit 10,718 11,363 (5.7) 7,713 39.0
OPM (%) 21.2 23.2 (200) bps 20.5 71 bps
Depreciation (1,429) (1,396) 2.4 (1,207) 18.4
Interest (97) (236) (58.9) (253) (61.7)
Other income (866) (457) 89.6 381 (327.4)
PBT 8,325 9,274 (10.2) 6,634 25.5
Tax (2,091) (264) 692.2 (1,461) 43.1
Effective tax rate (%) 25.1 2.8 22.3 22.0 3.1
Minority (91) - - (137) (33.6)
Adjusted PAT 6,143 9,010 (31.8) 5,036 22.0
Adj. PAT margin (%) 12.1 18.4 (625) bps 13.4 (120) bps
Exceptional - 1,200 - 1,340 -
Reported PAT 6,143 10,210 (39.8) 6,376 (3.7)
EPS (Rs) 26.4 43.9 (39.8) 27.4 (2.5)
Source: Company, India Infoline Research

Industry-leading growth continues; FY15 likely to be a repeat of FY14
Tech M’s dollar revenue growth at 4.3% qoq was much higher than our expectation of 3% qoq. This was the third successive quarter of revenue growth beat vis-à-vis street expectations and for the full year company delivered an industry-leading 18% revenue growth. Q4 FY14 had a revenue headwind of lower restructuring fees from BT with respect to one of the large contracts; however, this was more than compensated by seasonally robust revenue traction at Comviva and revenue recognition on a short-term project on completion. Volume growth stood at strong 4.6% qoq and the effort mix shifted onsite as the company is in process of initial transition work on large deals won recently. The TCV of the deals won during the quarter stood at ~US$270mn (new incremental revenues) which is higher than US$220mn won in the previous quarter. We believe that execution of the current order book, better pipeline (30-40% higher yoy) and improving win rate should enable Tech Mahindra to comfortably outperform Nasscom growth projection in the current fiscal.

Growth was more concentrated in nature during Q4 FY14; employee addition was robust   
Revenue growth during Q4 FY14 was almost entirely driven by the Top 10 clients which grew by robust 8.6% qoq. Growth in the Top 6-10 bucket was particularly strong at 13% qoq exhibiting wallet share gains by Tech Mahindra within key accounts aided by enhanced service offerings. Amongst verticals, growth was driven by the Telecom which grew 9% qoq. There was revenue decline in Manufacturing (-1% qoq) and Retail/Transportation/Logistics (-10% qoq) verticals. Revenue from Americas was flat sequentially while it grew by 4.3% qoq in Europe and robust 14% qoq in RoW region. Addition to software manpower was significant at 3,396, nearly 6% of the previous quarter base. This aligns with management’s confidence about continuance of revenue growth momentum. Attrition inched-up by 1% for the third consecutive quarter and reached 18%. 

OPM decline was higher than expected; outlook steady
Tech M’s operating margin declined by higher-than-expected 200bps to 21.2%. While, as expected, the annual salary hikes implemented from 1st Jan 2014 and lower BT restructuring fees combined impacted margin by ~250bps, onsite revenue shift (meaning continuance of higher transition costs) and marginal rupee appreciation acted as additional small headwinds. The key mitigating factors in the quarter were SG&A leverage (90bps) and some productivity gains. Margin outlook barring sharp currency movements remains stable as sustained growth traction would drive an improvement in employee utilization levels. Forex loss was higher in Q4 FY14 at US$28mn v/s US$23mn in the preceding quarter which depressed the profitability. 

Inexpensive valuation to provide comfort in the event of further rupee appreciation 
With the company estimated to deliver 21% pre-exceptional PAT CAGR over FY13-16, valuation at 11x FY16 P/E is attractive representing scope for re-rating in coming quarters as sector-leading growth continues. The key risk to our projections would be a steep appreciation of the rupee which will impact sector’s earnings materially. Tech M is one of our preferred picks in IT sector as valuation risk is low and growth visibility is high. Retain BUY rating and 9-12 month target price of Rs2,250.
 
Financial Summary
Y/e 31 Mar (Rs m) FY13 FY14 FY15E FY16E
Revenues (Rs m) 143,320 188,313 219,152 257,085
yoy growth (%) 22.5 31.4 16.4 17.3
Operating profit 30,632 41,836 47,579 56,072
OPM (%) 21.4 22.2 21.7 21.8
Pre-exceptional PAT (Rs mn) 21,157 29,201 31,178 37,491
yoy growth (%) 17.1 38.0 6.8 20.2

       
EPS (Rs) 84.2 130.9 134.3 161.4
P/E (x) 21.8 14.0 13.7 11.4
Price/Book (x) 6.2 4.6 3.6 2.9
EV/EBITDA (x) 13.1 9.2 7.8 6.2
RoE (%) 36.3 36.0 29.2 27.8
RoCE (%) 35.4 36.5 33.4 32.9
Source: Company, India Infoline Research

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