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Tech Mahindra 3QFY2013 performance highlights and results update

Contributed by Angel Broking

For 3QFY2013, Tech Mahindra reported a strong set of results for 3QFY2013, with operating performance ahead of our expectations. The EBITDA margin increase despite the lower margin profile of the two acquired companies, was encouraging. The company announced five deal wins during 3QFY2013 with a TCV of ~US$100mn and continues to chase 5-6 large deals in the pipeline. The ramp-up on the recently won deals will lend visibility to revenue growth and is expected to offset the decline in revenues from BT. We maintain Accumulate rating on the stock.

Result highlights: For 3QFY2013, Tech Mahindra reported USD revenue of US$329mn, up 10% qoq, aided by acquisition of HGS and Comviva. HGS contributed ~US$37mn to the revenues while Comviva contributed US$6mn (19 days contribution). In INR terms, revenue came in at Rs.1,791cr, up 9.8% qoq. The EBITDA margin grew by 31bp qoq to 21.0%, majorly because of headcount rationalization which led to improvement in utilization level also. The PAT came in at Rs.276cr, down 7% qoq, negatively impacted by lower profits from its associate company Mahindra Satyam. During the quarter, Mahindra Satyam paid Rs.294cr towards settlement of legal claims of Aberdeen.

Outlook and valuation: The Management indicated that the overall IT spending in the telecom vertical is expected to remain flat and it expects to see market share gains through higher cost optimization initiatives at client levels. The ramp ups on the recently won deals will lend visibility to revenue growth. We believe the increased traction in non-British Telecom (BT) accounts and consolidation of HGS (US$170mn annual revenue run rate) and Comviva (~US$70mn annual revenue run rate) will offset the decline in BT and will drive growth going forward. We expect a CAGR of 10.4% and 17.7% in USD and INR revenue over FY2012-14. We expect a 27.3% and 15.9% CAGR in EBITDA and PAT of Tech Mahindra over FY2012-14. Taking the new share count of 23.08cr shares (post merger of Tech Mahindra and Mahindra Satyam) into account, the consolidated EPS comes in at Rs.92.2. We value Tech Mahindra at 12x FY2014E EPS of Rs.92.2 and maintain Accumulate rating on the stock with a target price of Rs.1,105.