Tech Mahindra (Q1 FY13)

India Infoline News Service | Mumbai |

Tech Mahindra registered a largely in-line revenue performance for Q1 FY13, with dollar revenues of US$281.3mn (-0.1% qoq).

CMP Rs762, Target Rs850, Upside 11.6%

  • 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.

Results table
(Rs mn) Q1FY13 Q4 FY12 % qoq Q1 FY12 % yoy
Net sales 15,434 14,190 8.8 12,925 19.4
Operating profit 3,302 2,391 38.1 2,418 36.6
OPM (%) 21.4 16.8 454 bps 18.7 269 bps
Depreciation (421) (383) 9.9 (334) 26.0
Interest (240) (131) - (223) -
Other income (174) (211) (17.5) 460 (137.8)
PBT 2,467 1,666 48.1 2,321 6.3
Tax (585) (242) 141.7 (509) 14.9
Effective tax rate (%) 23.7 14.5 - 21.9 -
Other provisions / minority etc - - - (7) -
Adjusted PAT 1,882 1,424 32.2 1,805 4.3
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
Reported PAT 3,384 3,702 (8.6) 2,765 22.4
EPS (Rs) 26.5 29.2 (9.0) 21.9 (1.4)
Source: Company, India Infoline Research

Financial Summary
Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenues 51,402 54,897 62,249 67,088
yoy growth (%) 11.1 6.8 13.4 7.8
Operating profit 10,033 9,194 12,353 12,504
OPM (%) 19.5 16.7 19.8 18.6
Pre-exceptional PAT 6,441 11,630 11,532 11,625
Reported PAT 6,441 11,630 11,532 11,625
yoy growth (%) (8.0) 80.6 (0.8) 0.8
         
EPS (Rs) 51.1 92.3 91.5 92.3
P/E (x) 14.9 8.3 8.3 8.3
Price/Book (x) 2.9 2.4 1.9 1.5
BSE 501.15 [13.10] ([2.55]%)
NSE 500.75 [13.50] ([2.63]%)

***Note: This is a NSE Chart

 

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