Tech Mahindra, 1Q FY 2014

7/27/2019 Tech Mahindra, 1Q FY 2014

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Please refer to important disclosures at the end of this report 1

(` cr) 1QFY14 4QFY13 % chg (qoq) 1QFY13 % chg (yoy)Net revenue 4,103 3,767 8.9 3,373 21.7EBITDA 865 771 12.1 739 17.0

EBITDA margin (%) 21.1 20.5 60bp 21.9 (85)bp

Adj. PAT* 686 504 36.3 540 27Source: Company, Angel Research; Note:*exclude one-offs

For 1QFY2014, Tech Mahindra reported an inline operational performance whilenet profit came in better than expected due to higher other income. On an organicbasis, revenues grew 2.5% qoq despite a sharp decline of ~4% in revenues fromBritish Telecom (BT), which is reasonably good in our view. During the quarter, Tech

Mahindra won three large deals in the ERP space, with TCV of ~US$50-60mneach, and continues to chase four large deals in the pipeline. The ramp-up on therecently won deals will lend visibility to revenue growth and is expected to offset thedecline in revenues from BT. We maintain our Accumulate rating on the stock.Result highlights: For 1QFY2014, Tech Mahindra reported a revenue ofUS$724mn.During the quarter, Tech Mahindra won three large deals in the ERPspace, with TCV of ~US$50-60mn each. The EBITDA margin came in at 21.1%,up ~60bp qoq and ahead of our expectations of 20.9%. Margins were aided bya favorable currency impact (130bp qoq), which although was partially offset byan 80bp negative impact from higher expenses (especially visa related). Theconsolidated PAT came in at `686cr, up 36% qoq, aided by other income of`207cr as against `38cr in 4QFY2013.

Outlook and valuation: The Management indicated that the company remainsconfident of growth from the non-BT business with it continuing to see a robustdeal pipeline across geographies. The revamped sales team post consolidation ofSatyam and increased focus on sales efforts have started yielding results for thecompany. It signed three large deals in 1QFY2014, each having TCV of ~US$50-75mn and is pursing another four. Tech Mahindras top five clients (excluding BT)also grew faster than the company (~8% sequential growth), indicating benefitsfrom client mining. Tech Mahindra remains confident of improving revenue growth,citing healthy deal pipeline along with pick up in discretionary spending primarily inthe US. Further given the significant currency tailwinds akin to peers, Tech Mahindraremains confident of maintaining margins at current levels. We expect a CAGR of10.8% and 14.9% in USD and INR revenue respectively over FY2013-15E. Wevalue Tech Mahindra at 13.5x FY2015E EPS of `109 and maintain our Accumulaterating on the stock with a target price of `1,470.Key financials (Consolidated, Indian GAAP)

Y/E March (` cr) FY2011 FY2012 FY2013 FY2014E FY2015ENet sales 5,140 11,702 14,332 17,230 18,921% chg 11.1 127.7 22.5 20.2 9.8

Net profit 786 1,806 2,115 2,582 2,588% chg 10.9 129.8 17.1 22.0 0.2

EBITDA margin (%) 19.5 16.7 21.4 21.8 20.3

EPS (`) 49.3 78.0 82.6 108.8 109.0P/E (x) 26.3 16.6 15.7 11.9 11.9

P/BV (x) 5.0 3.5 4.5 3.3 2.6

RoE (%) 23.5 37.5 30.9 27.9 22.1

RoCE (%) 16.9 20.1 27.6 27.2 23.0

EV/Sales (x) 3.5 1.3 1.0 0.7 0.5

EV/EBITDA (x) 17.7 7.5 4.6 3.2 2.5

Source: Company, Angel Research

ACCUMULATECMP `1,294

Target Price `1,470

Investment Period 12 months

Stock Info

Sector

Net debt (` cr) (2,908)

Bloomberg Code

Shareholding Pattern (%)

Promoters 47.2

MF / Banks / Indian Fls 15.8

FII / NRIs / OCBs 26.8

Indian Public / Others 10.2

Abs. (%) 3m 1yr 3yr

Sensex (9.8) 3.5 (0.8)

Tech Mahindra 39.4 52.6 80.9

Face Value (`)

BSE Sensex

Nifty

Reuters Code

30,014

0.5

1347/775

133,568

IT

Avg. Daily Volume

Market Cap (` cr)

Beta

52 Week High / Low

10

18,308

5,415

TEML.BO

TECHM.IN

Ankita Somani+91 22 3935 7800 Ext: 6819

[email protected]

Tech MahindraPerformance Highlights

1QFY2014 Result Update | IT

August 19, 2013


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Tech Mahindra | 1QFY2014 Result Update

August 19, 2013 2

Exhibit 1:1QFY2014 performance (Consolidated, Indian GAAP)

(` cr) 1QFY14 4QFY13 % chg (qoq) 1QFY14 % chg (yoy) FY2013 FY2012 % chg (yoy)Net revenue 4,103 3,767 8.9 3,373 21.7 14,332 11,702 22.5Cost of revenue 2,569 2,397 7.2 2,101 22.3 9,001 7,541 19.4Gross profit 1,534 1,371 11.9 1,272 20.6 5,331 4,162 28.1

SG&A expense 669 599 11.7 533 25.6 2,268 2,210 2.6

EBITDA 865 771 12.1 739 17.0 3,063 1,952 56.9Dep. and amortization 117 121 (2.7) 92 28.3 390 319 22.1

EBIT 747 651 14.8 648 15.3 2,674 1,633 63.7

Interest 22 25 25 92 107

Other income 207 38 113 212 501

PBT 932 663 40.5 736 26.7 2,793 2,027 37.8

Income taxes 233 146 59.3 191 21.8 648 229 183.0

PAT 699 517 35.2 544 28.5 2,146 1,798 19.3

Minority interest 13 14 4 30 (8)

PAT after minority interest 686 504 36.3 540 27.0 2,115 1,806 17.1Profit from associates - - - - -

Exceptional item - 134 - 160 37

Reported PAT 686 638 7.6 540 27.0 1,955 1,843 6.1

Adj. PAT 686 504 36.3 540 27.0 2,115 1,806 17.1Diluted EPS 29.0 26.9 8.0 22.9 26.7 82.6 78.0 5.8

Gross margin (%) 37.4 36.4 100bp 37.7 (33)bp 37.2 35.6 163bp

EBITDA margin (%) 21.1 20.5 60bp 21.9 (85)bp 21.4 16.7 469bp

EBIT margin (%) 18.2 17.3 94bp 19.2 (100)bp 18.7 14.0 470bp

PAT margin (%) 16.7 13.4 336bp 16.0 70bp 14.8 15.4 (68)bp


Exhibit 2:1QFY2014 Actual vs Angel estimates

(` cr) Actual Estimate Var. (%)Net revenue 4,103 4,109 (0.1)

EBITDA margin (%) 21.1 20.9 17bp

PAT* 686 542 26.6


Inline performance

For 1QFY2014, Tech Mahindra reported USD revenue of US$724mn, up 3.7%

qoq, aided by acquisition of Complex IT. Excluding the impact of Complex IT

consolidation, the revenue growth stood at 2.5% sequentially. In INR terms, the

company reported revenues of `4,103cr, up 8.9% qoq; this was the first quarter

post merger of Tech Mahindra with Mahindra Satyam. The growth was healthy,

despite the 4.3% qoq decline in revenue from its top client - BT to US$87mn and

lower revenue from Comviva (~20% sequential fall) due to seasonality. BT

revenues are expected to remain flattish in the near term. The revenue from non-

BT accounts grew by 4.9% qoq to US$637mn. BT (post merger) now contributes

12% to revenues as against 17% in 1QFY2013. Tech Mahindra announced fourkey deal wins with three of them in the range of US$50-75mn each.


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Hiring and client metrics

The companys overall headcount declined by 46 employees to 83,063. This was

because of headcount rationalization in lower margin domestic BPO business. BPO

headcount declined by 1,430 employees with headcount standing at 23,269, while

the company witnessed an addition of 1,211 software professionals with

headcount standing at 53,337. The Management indicated that the company will

continue with its just-in-time hiring policy and will hire laterals on a need basis.

Exhibit 6:Employee metrics

Particulars 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14Software professionals 52,416 52,375 53,072 52,126 53,337

BPO professionals 18,229 28,611 26,379 24,699 23,269

Sales & support 5,647 5,920 6,195 6,284 6,457

Total employees 76,292 86,906 85,646 83,109 83,063

Attriiton (%) 17% 16% 16% 16% 15%


Exhibit 7:Trend in utilization rate


The companys client metrics saw some qualitative movement with clients getting

added in almost all the US$1mn+ revenue brackets. The company witnessed

addition of one client in US$50mn+ revenue bracket and three clients in

US$10-20mn revenue bracket. Overall, the company added 10 clients in

US$1mn+ revenue brackets. The total active client base of the company stood at

567 as against 516 in 4QFY2013. The companys growth was driven by non top

10 clients, the revenue from which grew by 5.8% qoq. Revenue from the top 5/10

clients grew by 3.7%/1.6% qoq.

75

74

76

77

76

72

73

74

75

76

77

78

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

(%)

Utilization (%)


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Exhibit 8:Client metrics

Particulars 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14Total active clients 484 475 475 516 567

US$1mn5mn 115 126 129 135 141US$5mn10mn 34 31 29 28 28

US$10mn20mn 18 22 26 18 21

US$20mn50mn 14 12 13 15 15

US$50mn+ 7 9 9 9 10


Operating margin improves

In 1QFY2014, the companys EBITDA margin expanded by 60bp qoq in

1QFY2014, despite the 80bp negative impact due to higher visa and other costs.

The increase in margins was on account of ~5% INR depreciation during the

quarter. We expect the margins to expand further in 2QFY2014 as the full impact

of rupees depreciation is likely to be felt in the next quarter. The company has also

indicated that it may give salary hikes to its employees in 4QFY2014 instead of

2QFY2014 as it realigns the salary structure of the two merged entities.

Exhibit 9:Margin trend


Outlook and valuation

The Management indicated that the company remains confident of growth from

the non-BT business with it continuing to see a robust deal pipeline across

geographies. As per the Management, overall IT spending in the telecom vertical is

expected to remain sluggish and it expects to see market share gains through

higher cost optimization initiatives at client levels.

The revamped sales team post consolidation of Satyam and increased focus on

sales efforts have started yielding results for the company. It signed three large

deals in 1QFY2014, each having TCV of ~US$50-75mn and is pursing anotherfour. Tech Mahindras top five clients (excluding BT) also grew faster than the

company (~8% sequential growth), indicating benefits from client mining.

37.7 36.838.0

36.437.4

21.9 21.5 21.720.5 21.1

19.2 18.9 19.317.3

18.2

10

15

20

25

30

35

40

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

Gross margin EBITDA margin EBIT margin


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August 19, 2013 6

Tech Mahindra remains confident of improving revenue growth citing healthy deal

pipeline along with pick up in discretionary spending primarily in the US. The

Management sounded confident of demand from BFSI (despite sluggishness in

1QFY2014, seeing spending in areas of regulatory compliance), healthcare(healthy demand across payers and providers) and manufacturing. Further given

significant currency tailwinds akin to peers, Tech Mahindra remains confident of

maintaining margins at current levels. We expect a CAGR of 10.8% and 14.9% in

USD and INR revenue respectively over FY2013-15E.

The company expects ramp-ups in large deals won recently in the next couple of

quarters. Transition costs in the same are expected to impact operating margins

negatively. However, the company has maintained strong focus on productivity,

and weeded out some low margin BPO contracts to offset the impact. Also, the

company deferred its wage hike to 4QFY2014 instead of 2QFY2014 as it realigns

the salary structure of the two merged entities. This will support operating marginsof the company further. We expect EBITDA margin to be at 21.8% and 20.3% in

FY2014 and FY2015, respectively from 21.4% in FY2013. PAT is expected to grow

at a CAGR of 10.6% over FY2014-15. We value Tech Mahindra at 13.5x FY2015EEPS of `109 and maintain Accumulate rating on the stock with a target price of`1,470.Tech Mahindra also proposed to increase the FII limit from current 35% to 45% of

paid-in capital, which may make it eligible for inclusion in MSCI Global Standard

Index, following Satyams removal in July.

Exhibit 10:Key assumptions

FY2014E FY2015ERevenue growth (US$) 12.0 9.7

USD-INR rate (realized) 58.4 58.5

Revenue growth (`) 20.2 9.8

EBITDA margin (%) 21.8 20.3

Tax rate (%) 25.0 25.0

EPS growth (%) 31.8 0.2



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Exhibit 11:One-year forward PE (x)

Source: Company, Angel Research. Note: P/E includes profits of Mahindra Satyam from FY2012

Exhibit 12:Recommendation summary

Company Reco CMP Tgt Price Upside FY2015E FY2015E FY2012-15E FY2015E FY2015E(`) (`) (%) EBITDA (%) P/E (x) EPS CAGR (%) EV/Sales (x) RoE (%)

HCL Tech Accumulate 929 1012 9.0 21.5 13.3 24.7 1.6 23.0

Hexaware Neutral 124 - - 20.5 9.6 13.1 1.3 23.5

Infosys Neutral 3,005 - - 26.4 15.9 9.2 2.6 19.3

Infotech Enterprises Accumulate 175 190 8.6 17.6 7.8 15.7 0.5 14.0

KPIT Cummins Accumulate 133 145 8.9 16.7 8.7 23.9 0.6 18.4

MindTree Accumulate 984 1050 6.7 19.9 9.3 25.1 0.9 20.3

Mphasis Neutral 382 - - 18.2 8.8 4.9 0.6 14.2

NIIT Neutral 18 - - 9.1 3.3 (7.1) (0.0) 11.9

Persistent Neutral 560 - - 22.5 9.9 17.0 0.8 16.1

TCS Buy 1,778 2,060 15.9 30.0 17.2 23.8 3.5 29.2

Tech Mahindra Accumulate 1,294 1,470 13.6 20.3 11.9 11.8 0.5 22.1Wipro Neutral 456 - - 21.6 14.6 11.2 1.9 19.4

Source: Company, Angel Research.

100

400

700

1,000

1,300

1,600

1,900

Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13

(`)

Price 16 13 10 7 4


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August 19, 2013 8

Company Background

Tech Mahindra was founded in 1986 as a joint venture between Mahindra Group

and British Telecom (BT). Later on, it started servicing other external clients as well

(solely in the telecom industry), though it still derives ~13% of its revenue from BT.

In June 2009, Tech Mahindra acquired a 42.7% stake in erstwhile Satyam

Computers (now Mahindra Satyam).

Profit and loss statement (Consolidated, Indian GAAP)

Y/E March (` cr) FY2011 FY2012 FY2013 FY2014E FY2015ENet sales 5,140 11,702 14,332 17,230 18,921Cost of revenues 3,403 7,541 9,001 10,686 12,070

Gross profit 1,737 4,162 5,331 6,544 6,851% of net sales 33.8 35.6 37.2 38.0 36.2

SG&A expenses 734 2,210 2,268 2,796 3,018% of net sales 14.3 18.9 15.8 16.2 15.9

EBITDA 1,003 1,952 3,063 3,748 3,833% of net sales 19.5 16.7 21.4 21.8 20.3

Dep. and amortization 144 319 390 507 549

% of net sales 2.8 2.7 2.7 2.9 2.9

EBIT 860 1,633 2,674 3,241 3,285

% of net sales 16.7 14.0 18.7 18.8 17.4

Interest expense 100 107 92 80 49

Other income, net of forex 117 501 212 350 285

Profit before tax 877 2,027 2,793 3,511 3,520

Provision for tax 132 229 648 878 880

% of PBT 15.0 11.3 23.2 25.0 25.0

Recurring PAT 746 1,798 2,146 2,634 2,640

Share from associates 44 - - - -

Exceptional item (143) 37 160 - -

Minority interest 4 (8) 30 52 52

Reported PAT 643 1,843 1,955 2,582 2,588Adjusted PAT 786 1,806 2,115 2,582 2,588Fully diluted EPS (`) 49.3 78.0 82.6 108.8 109.0


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August 19, 2013 10

Cash flow statement (Consolidated, Indian GAAP)

Y/E March (` cr) FY2011 FY2012 FY2013 FY2014E FY2015EPre tax profit from operations 760 1,526 2,581 3,161 3,235

Depreciation 144 319 390 507 549Expenses (deferred)/written off/others (99) - - - -

Pre tax cash from operations 804 1,845 2,971 3,668 3,784

Other income/prior period ad 114 510 182 298 272

Net cash from operations 918 2,354 3,153 3,966 4,056

Tax (132) (229) (648) (878) (880)

Cash profits 786 2,125 2,505 3,089 3,176

(Inc)/dec in

Sundry debtors 6 (1,685) (647) (313) (361)

Inventories 1 (14) 4 - -

Loans and advances (53) (332) (235) (258) (152)

Sundry creditors (214) 443 167 103 114

Others 315 1,141 673 245 136

Net trade working capital 55 (447) (39) (223) (263)

Cashflow from operating activities 841 1,678 2,466 2,865 2,913(Inc)/dec in fixed assets 104 (1,497) (1,025) (300) (300)

(Inc)/dec in investments 145 2,835 (1) - -

(Inc)/dec in other non-current assets (305) 149 (611) (321) (159)

Cashflow from investing activities (57) 1,487 (1,636) (621) (459)Inc/(dec) in debt (952) (33) (297) (200) (122)

Inc/(dec) in deferred revenue 392 40 (207) 30 30

Inc/(dec) in equity/premium 27 (155) 1 - -

Inc/(dec) in minority interest 2 (1) 119 - -

Addition to reserves on amalgamation (144) (60) 70 - -

Dividends (61) (127) (149) (181) (184)

Cashflow from financing activities (736) (336) (463) (351) (276)Cash generated/(utilized) 48 2,830 367 1,893 2,178

Cash at start of the year 219 267 3,096 3,463 5,356

Cash at end of the year 267 3,096 3,463 5,356 7,534


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August 19, 2013 11

Key Ratios

Y/E March FY2011 FY2012 FY2013 FY2014E FY2015EValuation ratio (x)P/E (on FDEPS) 26.3 16.6 15.7 11.9 11.9P/CEPS 21.5 7.9 13.1 9.9 9.8

P/BVPS 5.0 3.5 4.5 3.3 2.6

Dividend yield (%) 0.3 0.3 0.4 0.4 0.4

EV/Sales 3.5 1.3 1.0 0.7 0.5

EV/EBITDA 17.7 7.5 4.6 3.2 2.5

EV/Total assets 26.2 7.9 5.7 5.2 4.8

Per share data (`)EPS 49.3 78.0 82.6 108.8 109.0

Cash EPS 60.3 164.0 98.8 130.1 132.1

Dividend 4.0 4.0 5.0 5.0 5.0

Book value 257.0 365.2 288.7 389.8 492.7

Dupont analysisTax retention ratio (PAT/PBT) 0.9 0.9 0.7 0.7 0.7

Cost of debt (PBT/EBIT) 1.0 1.2 1.0 1.1 1.1

EBIT margin (EBIT/Sales) 0.2 0.1 0.2 0.2 0.2

Asset turnover ratio (Sales/Assets) 7.6 6.3 5.8 7.5 9.3

Leverage ratio (Assets/Equity) 0.2 0.4 0.4 0.2 0.2

Operating ROE (%) 22.3 38.3 28.5 27.9 22.1

Return ratios (%)RoCE (pre-tax) 16.9 20.1 27.6 27.2 23.0

Angel RoIC 18.1 36.8 46.2 52.9 52.1

RoE 23.5 37.5 30.9 27.9 22.1

Turnover ratios( x)Asset turnover (fixed assets) 7.6 6.3 5.8 7.5 9.0

Receivables days 74 59 78 78 78


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August 19 2013 12

Research Team Tel: 022 - 3935 7800 E-mail: [email protected] Website: www.angelbroking.com

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Disclosure of Interest Statement Tech Mahindra

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

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