Tech Mahindra: It's time has come, at last, says Espirito Santo Securities
Moneylife Digital Team 10 September 2012

With most of the operations being rationalised and just financial integration pending post-merger, is this a good time to buy the Tech Mahindra share? Yes, says Espirito Santo Securities

 
Barring announcement of large deals from BT (British Telecom), only to be downsized later, Tech Mahindra has had very few moments to cherish post the IPO (initial public offer) in 2006, says Espirito Santo Securities in its market update report. However, with Satyam now back into its groove (it is expected that there will be a 10% revenue growth in FY13E) and Tech Mahindra seeing traction in large deals, it is expected that there will be similar growth rates for Tech Mahindra as well. 
 
But with most of the operations being rationalised and just financial integration pending post-merger, is this a good time to buy Tech Mahindra? “We definitely think so” says Espirito Santo Securities.
 
Some of the concerns that investors commonly have in acquiring Tech Mahindra share are addressed below:
 
Concern #1: Revenue growth in Tech Mahindra will remain subdued: Without the Hutchison BPO deal, growth would have been in low single digits, but with this deal it is estimated that Tech Mahindra’s growth is at 10% in FY13. In FY14, Tech Mahindra can maintain revenue growth of 10% as AT&T, though a large account for Tech Mahindra, could easily grow by 10%. It is estimated that there are four more outsourcing deals in the pipeline from Europe which could materialise in H2FY13.
 
Concern #2: Revenue growth of Satyam is not sustainable: Espirito does not see downside risk to Satyam’s growth trajectory as: i) the company’s average revenue per client is only $4.2 million Vs $10 million for Infosys, implying plenty of opportunity to mine existing clients, ii) the company’s focus on mining the top 30 clients is easily workable as the top client contributes only $164 million in annual revenues while the next four contribute an average of $58m, which implies significant room for penetration Vs peers (70-80 clients are Fortune 500 clients). It is expected that there will be 10% growth in revenues n FY13E.
 
Concern #3: Consolidated margins are not sustainable: Tech Mahindra’s EBITDA margins fell from 23.8% in Q3FY10 to 15.3% in Q2FY12 due to: i) decline in realizations from the BT account, ii) higher growth in BPO, and iii) large deals with Etisalat and Sing Tel during the period. However, with i) significant declines in BT over with in the near term and room for growth in AT&T, and ii) cost rationalisation underway, and consequently, there are enough margin buffers at Tech Mahindra. Secondly, Satyam has margins of 21.7% and room to improve its bulge mix. Post the merger, it is believed that the company has ample buffers to manage margins.
 
Valuations are now cheap on a consolidated basis. It is estimated that there will be a consolidated profit of Rs1,840 crore in FY14 and earnings per share of Rs90, after extinguishing treasury stock, which is a 23% discount to HCL Tech.
 
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