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Tech Mahindra has run-up over 6 per cent in the past two trading sessions - outperforming both Sensex and BSE IT indices which grew by about 2 per cent each in the same period. The scrip has outperformed these indices since June 2012 on the back of strong deal wins, Satyam merger completion and good inorganic growth.
Despite this run up, current valuations of 11.4 times FY14 estimated earnings seem to be compelling, believe analysts. Interestingly, all 11 analysts polled by Bloomberg on 13th August 2013 have a buy rating on Tech Mahindra with average target price of Rs 1,480. This translates into 12 per cent upsides from current levels.
"Given Tech Mahindra's relatively large size and management quality, we consider this a solid stock and valuations look attractive. While the 48 per cent exposure to telecom is a concern, the company appears to be navigating this well by virtue of its scale and acquisitions. We revise target price to Rs 1,500 (from Rs 1,040)", says Anantha Narayan, IT analyst at Credit Suisse. He has upgraded the stock from Neutral to Outperform post the results.
Strong show by the mid-cap IT company for the quarter ended 30th June 2013 is another indication of the sound prospects of Tech Mahindra. Post the results, most analysts have raised their earnings estimates for the company.
“Tech Mahindra witnessed another good quarter. New deal signings lend comfort on sustainability. We raise FY14-16 earnings estimates by 22-25 per cent - majority of which is Rupee driven and target price by 30 per cent to Rs 1,430. We expect organic revenue growth of 7.2 per cent in FY14", says Kawaljeet Saluja, IT analyst at Kotak Institutional Equities.
Management remained confident on the growth given the pick up in discretionary spending and strong deal momentum in US and some parts of Europe. The company has successfully managed to scale up revenues from non-Telecom verticals and attain profitable growth. While revenues from its largest client British Telecom (BT) continue to slide, non-BT clients are witnessing strong growth aiding its growth prospects.
"Expanded offerings (after the merger and four acquisitions in FY13), and results from the new sales and large-deal teams now seem to benefiting Tech Mahindra. We believe improvements in the employee pyramid (28 per cent with less than three years’ experience), utilization, low-margin accounts and BPO productivity could all add to margins and leave enough buffer to re-invest FX benefits for growth initiatives", believes Abhiram Eleswarapu, IT analyst at BNP Paribas.
Strong traction in non-BT clients, healthy deal pipeline
Tech Mahindra's consolidated revenues grew 8.9 per cent sequentially to Rs 4,103 crore for the quarter ended 30th June 2013. This growth was led by strong traction in non-BT clients and consolidation of Mahindra Satyam ( and smaller contribution from Complex IT) acquisition. Given that revenues from BT (12 per cent of total revenues) fell 1.6 per cent, this topline growth is pretty impressive. Though a weaker rupee aided the performance, constant currency revenue growth of 4.4 per cent too is good. Key verticals such as manufacturing, retail and media/technology each grew by 5 per cent plus. Telecom too grew by 2 per cent. Thus, the growth was broad-based. Amongst key geographies, Americas grew 11 per cent and Europe grew 1.1 per cent. India business remained weak.
Positively, a weaker rupee offset pressures arising from lower Complex IT margins, higher visa costs and fall in utilisation rates. Consequently, EBITDA margin expanded 60 basis points sequentially to 21.1 per cent. Net profit stood at Rs 686 crore, up 7.6 per cent sequentially and was boosted by forex gain of Rs 125 crore.
The company signed 12 deals in the quarter with three between $50-75 million revenues. The deal pipeline appears healthy and provides increased revenue visibility for Tech Mahindra. BT revenues though could fall by 12 per cent this fiscal, believe analysts.
