Tech Mahindra registered a largely in-line revenue performance for Q1 FY13, with dollar revenues of US$281.3mn (-0.1% qoq). Volumes on a consolidated basis grew 1% qoq and pricing remained flat. In rupee terms, the revenues grew 8.8% sequentially on the back of strong rupee depreciation.
The BT business (in GBP terms) de-grew ~3% qoq and on the other hand, Non-BT business grew 1.5% qoq on a constant currency basis. Though the re-tendering process at BT has slowed down, there continues to be rationalization of IT assets and management sees flat to marginal negative outlook for the business going forward. On a positive note, Tech M has been able to increase its wallet share in the BT account amidst the restructuring.
Growth among clients was mainly led by clients outside Top client. While Top5/Top10 clients grew 3%/6% qoq in dollar terms, interestingly, Top2-5 clients registered strong growth of 9% growth qoq in dollar terms. Managed services business continues to support the growth and is expected to grow strongly on the back of robust pipeline especially in Europe. Amongst geographies, in dollar terms, US led the growth growing 3% qoq with Europe and Row de-growing 2%/5% respectively.
OPM expansion during the quarter was a material positive surprise expanding 450bps qoq against our expectation of 200bps supported by rupee depreciation and continued direct costs /SG&A rationalization. While rupee depreciation helped to expand the margin by 330bps, Infrastructure rationalization, SG&A efficiencies as well as absolute reduction in employee base further bolstered the margin by 150bps. Wage hike during Q2 FY13 is key headwind from margin perspective going forward with utilization and employee pyramid being possible offsetting levers. A strong margin beat in Q1 FY13 resulted in better than estimated PAT of Rs3.21bn (including profit of associates). On the employee front, exit from certain domestic unviable BPO projects was the key reason for de-growth in employee base (-0.3% qoq).
We are encouraged by the strong OPM improvement as well as improved demand commentary especially in non BT accounts and in managed services arena (a key focus area for Tech M). Stabilising BT account (revenue contribution is largely stable over past four quarters) and also positive commentary by larger peers (especially TCS) on reviving telecom demand bode well for the company. Though, the continued reduction in employee base is notable, flux in BT business as well as exiting of certain domestic unviable BPO accounts largely allay our concern. We conservatively estimate 6% dollar revenue CAGR over FY12-14E. Assign BUY with a 9-month TP of Rs850.
|(Rs mn)||Q1FY13||Q4 FY12||% qoq||Q1 FY12||% yoy|
|OPM (%)||21.4||16.8||454 bps||18.7||269 bps|
|Effective tax rate (%)||23.7||14.5||-||21.9||-|
|Other provisions / minority etc||-||-||-||(7)||-|
|Adj. PAT margin (%)||12.2||10.0||216 bps||14.0||(177) bps|
|Share of Satyam profits/minority etc||1,502||2,278||(34.1)||960||56.5|
|Y/e 31 Mar (Rs m)||FY11||FY12||FY13E||FY14E|
|yoy growth (%)||11.1||6.8||13.4||7.8|
|yoy growth (%)||(8.0)||80.6||(0.8)||0.8|
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