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Spark Capital: Tech Mahindra 3QFY13 results update




Spark Capital Advisors(India) Private Limited


20 Feb 2013





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Tech Mahindra: Continues to reduce exposure BT; Retain ADD Tech Mahindra (TECHM) reported inline results with revenue growth of 10.4% qoq and adjusted EBITDA margin 18.7%. Organic revenue growth was flat qoq with decline in BT offsetting increase in non-BT business. Exposure to BT would reduce from existing 29% as BT continues to decline while full quarter integration of Comviva and growth in deals won in the last six months ramp-up. Management is cautiously confident of growth in non-BT business as companies in telecom ecosystem continue to be under stress. We value TECHM at 11x Dec-14EPS post merger EPS to arrive at our price target of Rs. 1,100. Retain ADD. Acquisitions drive revenue growth: Hutchison Global Services was integrated for the entire quarter and accounted for US$ 37mn vs. 13.3mn last quarter. Revenue from Comviva was included 3 weeks and contributed revenue of US$ 6mn. BT continues to decline and management commentary indicates further decline in the next two quarters. Non BT business registered an organic growth of 2%. We believe growth trajectory will improve with deals won ramping up starting 4QFY13. Operating margins continuing to improve: EBITDA margin expanded 50bps sequentially even after integration of lower margin HGS and Comviva. Margin expansion was aided by continued focus in driving productivity and improving employee pyramid. We believe the integration of Comviva especially givens its seasonality in revenues and ramp-up cost in some of deals won will keep margin in check. Organic growth would continue to be weak: TECHM organic revenue growth has been low due to its exposure to Telecom vertical and BT. We note that TECHM’s growth in comparison to telecom verticals of Tier-1 companies continues to be better. For FY14 we expect the reduced exposure to BT should augur well and drive revenue growth. We forecast FY14 organic growth of 7.5% on the back of deals won in 3Q (TCS of US$ 100) and couple of deals won in 2Q. Retain ADD: TECHM stock has been a strong performer despite BT selling its stake in the company. From here on we expect the ask to be steeper and believe revenue growth would be a key driver. We value TECHM at 11x Dec-14EPS post merger EPS to arrive at our price target of Rs. 1,100. Retain ADD.

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