Recommendations » India

Tech Mahindra 3QFY2012 performance highlights and results update

Contributed by Angel Broking

For 3QFY2012, Tech Mahindra reported subdued performance with revenue as well as profit coming in below ours as well as street’s expectations. BT business was a major growth dampener, USD revenue of which declined by 7.8% qoq. Growth came from non-BT business yet again, which grew by 0.6% qoq. BT has started retendering its work; this poses risk to Tech Mahindra’s revenue run rate. However, due to the company’s stake in Mahindra Satyam, we maintain our Accumulate rating on the stock.

Result highlights: For 3QFY2012, Tech Mahindra reported USD revenue of US$288.7mn, down 2.5% qoq due to a 0.5% qoq decline in volume and ~2.0% qoq negative cross-currency impact. In INR terms, revenue came in at Rs.1,445cr, up 8.4% qoq, largely aided by qoq INR depreciation. EBITDA margin of the company improved by 90bp qoq to 16.2% on the back of INR depreciation.

Outlook and valuation: We expect the non-BT business to post a CQGR of 2.4% over 3QFY2012-4QFY2013, with BT’s quarterly revenue expected to be flat from  here. However, there is a caveat that BT’s revenue may see a downside if the company loses out its market share in the retendering process initiated by BT. In fact, even if the company manages to hold the share or increase it, it can be margin dilutive as the client has initiated this retendering process as part of its cost-cutting drive with lower pricing expectation. Thus, we expect a 7.6% CAGR in USD revenue over FY2011-13E. The company’s core EPS is expected to post a negative CAGR over FY2011-13E. The only potential upside is due to the company’s stake in Mahindra Satyam, which is improving its overall profitability. We continue to value the company at 55% discount to Infosys’ target PE i.e., at 8x the company’s consolidated EPS of Rs.86.4 and maintain our Accumulate rating on the stock with a target price of Rs.693.