Tech Mahindra (Q3 FY14)

India Infoline News Service | Mumbai |

Tech M’s consolidated dollar revenue growth at 4.4% qoq was much higher than our expectation of 2.7% qoq.

CMP Rs1,840, Target Rs2,125, Upside 15.5% 
  • Tech M’s consolidated dollar revenue growth at 4.4% qoq was much higher than our expectation of 2.7% qoq. Constant currency growth stood at 3.4% qoq and company witnessed cross currency tailwind of 1%. Revenues mix continued to move onsite (by 100bps qoq to 52%) as the company is in process of initial transition work on large deals it won recently. The TCV of the deals won during the quarter stood at ~US$220mn (new incremental revenues). As per the management, company’s latest acquisition of Mahindra Engineering Services is likely to be merged by Q2 FY15. 


  • The base of revenue contributing clients expanded to 605 v/s 576 in the previous quarter manifesting sustained impressive client additions (added 132 clients over the past 12 months). Except for the Top client (BT), revenue growth was robust in the Top 5 and Top 10 client revenue buckets reflecting company’s improved mining in key accounts. Addition to software manpower was strong for the second consecutive quarter at 2,169 employees, nearly 4% of the previous quarter base. This aligns with management’s confidence with regards to continuance of revenue growth momentum.   


  • Growth in Q3 FY14 was driven by BFSI (16% qoq), Telecom (4.4% qoq) and Manufacturing (4.4% qoq) verticals. There was a revenue decline of 4% qoq in TME vertical.  While revenues from Europe region de-grew by 2% qoq (due to revenue decline at Top client), the US region grew by strong 12% qoq on the back of ramp-up in some large deals in the BFSI space.


  • OPM performance was better than our expectation with margin remaining flat at 23.2%. The headwind from the onsite revenue shift was mitigated by SG&A containment. With annual salary hikes implemented from Jan 2014, current quarter is likely to see margin impact of up to 200bps which would be partially offset by lower transition cost. In the medium-to-longer term, utilization improvement (scope for 200bps), SG&A leverage (currently at 15.5%, 150-200bps higher than larger peers) and optimization of employee pyramid would be critical margin improvement levers. We expect Tech M to sustain operating margin near 23% in FY15 despite the absence of BT restructuring revenues. 


  • Forex loss was significantly higher in Q3 FY14 at US$23mn v/s US$4mn in the preceding quarter. During the quarter, Tech M wrote back excess provision for contingencies (related to erstwhile Satyam) provided in earlier years on reevaluation. Further, the company also reversed tax provision (related to erstwhile Satyam) worth Rs2.3bn being no longer required. On account of these provisioning write-backs, the profit jumped 42% qoq to Rs10.2bn. 


  • On the back of strong operational performance in a seasonally weak December-ending quarter, we revise our FY14/15 growth, margin and earnings assumptions upwards for Tech M. With the company estimated to deliver 22-23% pre-exceptional earnings CAGR over FY13-16, valuation at 11x FY16 P/E is attractive representing scope for significant re-rating if company continues to deliver sector-leading growth in coming quarters. Retain BUY on Tech M with an upgraded 9-12 month target price of Rs2,125.

Result table
(Rs mn)
Q3 FY14
Q2 FY14
% qoq
Q3 FY13
% yoy
Net sales
48,985
47,715
2.7
36,683
33.5
Operating profit
11,363
11,110
2.3
7,957
42.8
OPM (%)
23.2
23.3
(10) bps
21.7
151 bps
Depreciation
(1,396)
(1,222)
14.2
(866)
61.2
Interest
(236)
(241)
-
(204)
-
Other income
(457)
381
(220.0)
1,308
(134.9)
PBT
9,274
10,028
(7.5)
8,195
13.2
Tax
(264)
(2,840)
(90.7)
(1,931)
(86.3)
Effective tax rate (%)
2.8
28.3
-
23.6
-
Minority
-
(4)
-
(109)
-
Adjusted PAT
9,010
7,184
25.4
6,155
46.4
Adj. PAT margin (%)
18.4
15.1
334 bps
16.8
161 bps
Exceptional items
1,200
-
-
(2,940)
-
Reported PAT
10,210
7,184
42.1
3,215
217.6
BSE 501.15 [13.10] ([2.55]%)
NSE 500.75 [13.50] ([2.63]%)

***Note: This is a NSE Chart

 

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