tech mahindra result updated

8/3/2019 Tech Mahindra Result Updated

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

(` cr) 3QFY12 2QFY12 % chg (qoq) 3QFY11 % chg (yoy)Net revenue 1,445 1,333 8.4 1,211 19.3EBITDA 234 204 14.8 250 (6.2)

EBITDA margin (%) 16.2 15.3 90bp 20.6 (441)bp

Adj. PAT* 276 290 (5.0) 257 7.4Source: Company, Angel Research; Note:*exclude one-offs

For 3QFY2012, Tech Mahindra reported subdued performance with revenue as

well as profit coming in below ours as well as streets 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 Mahindras revenue run rate.

However, due to the companys stake in Mahindra Satyam, we maintain ourAccumulate rating on the stock.Result highlights: For 3QFY2012, Tech Mahindra reported USD revenue ofUS$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 `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 BTs quarterly revenue expected to be flat fromhere. However, there is a caveat that BTs 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 companys core EPS is expected to post a

negative CAGR over FY2011-13E. The only potential upside is due to the

companys 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 8xthe companys consolidated EPS of `86.4 and maintain our Accumulate rating onthe stock with a target price of `693.Key financials (Consolidated, Indian GAAP)

Y/E March (` cr) FY2009 FY2010 FY2011 FY2012E FY2013ENet sales 4,465 4,625 5,140 5,520 6,153% chg 18.6 3.6 11.1 7.4 11.5

Reported net profit 1,014 700 643 1,061 1,140% chg (30.9) (8.3) 65.1 7.4

EBITDA margin (%) 27.2 24.5 19.5 16.9 17.1

EPS (`) 77.4 53.6 49.3 84.2 86.4P/E (x) 8.5 12.3 13.4 7.8 7.6

P/BV (x) 4.4 3.0 2.6 2.0 1.6

RoE (%) 48.7 24.6 23.5 24.5 21.1RoCE (%) 56.6 19.8 16.6 14.6 15.0

EV/Sales (x) 1.8 2.3 1.9 1.6 1.3

EV/EBITDA (x) 6.6 9.3 9.5 9.8 7.9

Source: Company, Angel Research

ACCUMULATECMP `659

Target Price `693

Investment Period 12 months

Stock Info

Sector

Bloomberg Code

Shareholding Pattern (%)

Promoters 70.9

MF / Banks / Indian Fls 15.2

FII / NRIs / OCBs 4.9

Indian Public / Others 9.0

Abs. (%) 3m 1yr 3yr

Sensex (3.4) (4.6) 75.0

Tech Mahindra 9.5 12.7 181.1

10

17,8315,412

TEML.BO

TECHM.IN

8,593

1.0

798/524

41,643

IT

Avg. Daily Volume

Market Cap (` cr)

Beta

52 Week High / Low

Face Value (`)

BSE SensexNifty

Reuters Code

Ankita Somani+022 3935 7800 Ext: 6819

[email protected]

Tech MahindraPerformance Highlights

3QFY2012 Result Update | IT

February 9, 2012


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Tech Mahindra | 3QFY2012 Result Update

February 9, 2012 2

Exhibit 1:3QFY2012 performance (Consolidated, Indian GAAP)

(` cr) 3QFY12 2QFY12 % chg (qoq) 3QFY11 % chg (yoy) 9MFY12 9MFY11 % chg (yoy)Net revenue 1,445 1,333 8.4 1,211 19.3 4,071 3,580 13.7Cost of revenue 986 907 8.7 788 25.1 2,747 2,318 18.5Gross profit 459 426 7.6 423 8.5 1,323 1,261 4.9

SG&A expense 225 222 1.0 173 29.7 643 530 21.3

EBITDA 234 204 14.8 250 (6.2) 680 731 (7.0)Dep. and amortisation 39 51 (23.1) 35 12.4 123 105 17.5

EBIT 195 153 27.3 215 (9.2) 557 626 (11.0)

Interest 34 33 25 90 53

Other income 15 59 52 73 79

PBT 176 179 (1.4) 242 (27.2) 541 651 (17.0)

Income taxes 29 39 (25.2) 36 (18.1) 120 109 9.8

PAT 147 139 5.3 206 (28.7) 421 542 (22.3)

Minority interest 2 1 380.0 1 300.0 4 2 89.5

PAT after minority interest 144 139 4.0 205 (29.7) 418 541 (22.7)Profit from associates 132 102 52 329 158

Exceptional item - 50 - 50 (143)

Final PAT 276 240 14.7 257 7.4 747 699 6.9

Adj. PAT 276 290 (5.0) 257 7.4 797 555 43.5Diluted EPS 20.9 22.0 (5.1) 19.7 6.1 43 22.5 90.7

Gross margin (%) 31.8 32.0 (23)bp 34.9 (316)bp 32.5 35.2 (272)bp

EBITDA margin (%) 16.2 15.3 90bp 20.6 (441)bp 16.7 20.4 (371)bp

EBIT margin (%) 13.5 11.5 201bp 17.8 (424)bp 13.7 17.5 (381)bp

PAT margin (%) 10.0 10.4 (42)bp 17.0 (697)bp 10.3 15.1 (484)bp


Exhibit 2:3QFY2012 Actual vs. Angel estimates

(` cr) Actual Estimate Var. (%)Net revenue 1445 1511 (4.4)

EBITDA margin (%) 16.2 17.4 (119)bp

PAT* 144 184 (21.5)

Source: Company, Angel Research; Note: *Excludes share of profits from Mahindra Satyam

Muted revenue growth

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. This was because of a 7.8% qoq decline in USD revenue

from BT account to US$101mn (64mn). USD revenue from non-BT business grew

merely by 0.6% qoq to US$188mn. In INR terms, revenue came in at `1,445cr, up

8.4% qoq, largely aided by qoq INR depreciation. Going ahead, the company

expects business from non-BT accounts to be its key growth driver.


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February 9, 2012 3

Exhibit 3:Trend in revenue growth for non-BT accounts


Management indicated that BT business may continue to decline in the next few

quarters, as BT is retendering its contracts. This may lead to Tech Mahindra losing

its share in BT contracts, as clearly the client is looking out for a lower pricing

opportunity as part of its cost-cutting drive. So, even if the company manages to

hold or gain its share, it is expected to be operating margin dilutive.

Exhibit 4:Revenue trend for BT account


The companys revenue from telecom service providers (TSPs) (~78.6% to revenue)

and telecom equipment manufacturers (TEMs) (~7.3% to revenue) grew by 4.5%

and 31.5% qoq to `1,135cr and `106cr, respectively.

The companys top 2-5 clients drove its growth in 3QFY2012, by registering

whopping 0.6% qoq USD revenue growth. Revenue from the companys top 6-10

clients declined by 2.5% qoq during the quarter.

151

164

174

187 188

0.7

9.1

5.8

7.3

0.60

4

8

12

120

130

140

150

160

170

180

190

200

3QFY11 4QFY11 1QFY12 2QFY12 3QFY12

(%)

(US$mn)

Non BT qoq growth

118

114

116

110

101

3.0

(3.5)

1.5

(5.5)

(7.8)

(10)

(8)

(6)

(4)

(2)

0

2

4

100

105

110

115

120


(%)

(US$mn)

BT qoq growth


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February 9, 2012 5

Exhibit 7:Margin trend


Client pyramid

Tech Mahindras client pyramid witnessed slight improvement with one of

its clients being added to the US$20mn-25mn bracket from lower revenue bracket.

Also, US$1mn-2mn revenue bracket witnessed addition of three new clients. The

active client base of the company increased to 130 in 3QFY2012 from 128 in

2QFY2012.

Exhibit 8:Client metrics

Particulars 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12US$1mn2mn 14 18 20 19 22

US$2mn5mn 19 16 13 14 13

US$5mn10mn 5 6 8 13 13

US$10mn15mn 7 7 9 6 6

US$15mn20mn 2 1 1 2 2

US$20mn25mn 1 3 2 2 3

US$25mn50mn 2 1 1 2 2

US$50mn+ 3 3 3 2 2

Active clients 126 128 128 128 130


Outlook and valuation

Management is witnessing traces of demand revival from TSPs and foresees them

to return to spending on 4G technology and cloud only in FY2012. We expect the

non-BT business to post a CQGR of 2.4% over 3QFY2012-4QFY2013, with BTs

quarterly revenue expected to be flat from here. However, there is a caveat that

BTs 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.

34.936.7

33.932.0 31.8

20.6 20.518.7

15.3 16.2

17.8 17.516.1

11.513.5

10

15

20

25

30

35

40


(%)

Gross profit margin EBITDA margin EBIT margin


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February 9, 2012 6

PAT is expected to be supported by 1) the deep in-the-money hedges of 305mn

and US$540mn with participation rates at 83 INR/GBP and 50 INR/USD, boosting

forex gains for the company; and 2) declining interest expense due to quick

repayments possible from Mahindra Satyams strong earnings. Thus, thecompanys core EPS is expected to have a negative CAGR over FY2011-13E. The

only potential upside is due to the companys stake in Mahindra Satyam, which is

improving its overall profitability. Since, the companys core earnings are subdued

and the huge contribution (~33%) to its consolidated earnings is due to Mahindra

Satyams profitability, we continue to value the company at 55% discount toInfosys target PE i.e., at 8x the companys consolidated EPS of `86.4 and maintainour Accumulate rating on the stock with a target price of `693.Exhibit 9:Key assumptions

FY2012E FY2013ERevenue growth (US$) 9.5 5.7

USD-INR rate (realized) 47.4 50.0

Revenue growth (`) 7.4 11.5

EBITDA margin (%) 16.9 17.1

Tax rate (%) 20.9 23.0

EPS growth (%) 70.9 2.6


Exhibit 10:One-year forward PE (x)

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

2QFY2011 onwards.

100

400

700

1,000

1,300

1,600

1,900

2,200

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

(`)

Price 23 18 13 8 4


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February 9, 2012 7

Exhibit 11:Recommendation summary

Company Reco CMP Tgt Price Upside Target FY2013 FY2013E FY2011-13E FY2013E FY2013E(`) (`) (%) P/E (x) EBITDA (%) P/E (x) EPS CAGR (%) RoCE (%) RoE (%)

HCL Tech Accumulate 465 520 11.9 13.0 17.5 11.6 22.1 20.9 23.1Hexaware Neutral 106 - - 11.0 19.0 11.4 79.4 25.4 22.0

Infosys Accumulate 2,807 3,047 8.5 18.0 32.0 16.6 18.9 25.8 23.8

Infotech Enterprises Neutral 138 - - 8.5 16.0 8.8 11.9 16.1 13.0

KPIT Cummins Neutral 166 - - 10.0 15.4 10.2 19.9 19.5 16.9

Mahindra Satyam Buy 72 87 20.2 11.0 16.0 9.0 38.4 12.6 14.4

MindTree Accumulate 455 502 10.3 10.0 14.7 9.1 42.1 20.3 17.4

Mphasis Neutral 373 - - 11.5 16.6 10.1 (3.1) 14.0 14.2

NIIT^ Buy 45 55 22.8 6.9 16.3 5.6 19.3 11.0 15.6

Persistent Neutral 316 - - 9.0 23.0 9.0 0.1 19.4 14.3

TCS Neutral 1,227 - - 19.5 29.9 19.0 20.6 32.1 33.3

Tech Mahindra* Accumulate 659 693 5.2 8.0 17.1 7.6 32.3 15.0 21.1 Wipro Neutral 445 -- 15.3 19.7 16.0 13.1 15.3 20.5

Source: Company, Angel Research. Note: ^Valued on SOTP basis,* EPS CAGR includes earnings from Mahindra Satyam


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February 9, 2012 8

Profit and loss statement (Consolidated, Indian GAAP)

Y/E March (` cr) FY2009 FY2010 FY2011 FY2012E FY2013ENet sales 4,465 4,625 5,140 5,520 6,153

Cost of revenues 2,638 2,871 3,403 3,702 4,094Gross profit 1,827 1,754 1,737 1,818 2,059% of net sales 40.9 37.9 33.8 32.9 33.5

SG&A expenses 612 622 734 887 1,009

% of net sales 13.7 13.4 14.3 16.1 16.4

EBITDA 1,215 1,133 1,003 931 1,050% of net sales 27.2 24.5 19.5 16.9 17.1

Depreciation and amortization 110 134 144 165 175

% of net sales 2.5 2.9 2.8 3.0 2.8

EBIT 1,106 999 860 766 875% of net sales 24.8 21.6 16.7 13.9 14.2

Interest expense 3 218 100 115 54

Other income,net of forex gain/(loss)

(38) 75 117 164 111

Profit before tax 1,065 856 877 814 932

Provision for tax 118 144 132 172 214

% of PBT 11.1 16.8 15.0 21.1 23.0

Recurring PAT 947 712 746 642 718Share from associates 44 423 422

Exceptional item 67 (9) (143) - -

Minority interest - 3 4 5 -

Profit after minority interest 1,014 700 643 1,061 1,140Reported PAT 947 709 786 1,061 1,140Fully diluted EPS (`) 77.4 53.6 49.3 84.2 86.4



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February 9, 2012 9

Balance sheet (Consolidated, Indian GAAP)

Y/E March (` cr) FY2009 FY2010 FY2011 FY2012E FY2013EEquity capital 122 122 126 126 126

Preference capital - - - - -Share premium 233 237 233 233 233

Profit and loss 1,401 1,783 2,365 3,351 4,411

Other reserves 187 744 627 627 627

Net worth 1,943 2,887 3,351 4,338 5,397Secured loans - 750 - - -

Unsecured loans - 1,385 1,223 907 407

Total debt - 2,135 1,223 907 407

Deferred revenue 584 - -

Minority interest 11 14 16 16 16

Total capital employed 1,954 5,035 5,174 5,260 5,823Gross block 908 1,131 1,273 1,433 1,588

Accumulated depreciation (410) (527) (670) (836) (1,011)

Net block 498 604 602 597 577

Capital WIP 154 321 125 140 160

Total fixed assets 652 925 727 737 737Investments 435 3,015 2,908 2,872 2,870

Deferred tax asset, net 20 28 64 73 75

Inventories 1 1 - - -

Sundry debtors 902 1,042 1,247 1,225 1,357

Cash and cash equivalents 538 219 267 395 696

Loans and advances 295 673 832 883 1,015

Sundry creditors (469) (461) (510) (528) (573)

Other liabilities (205) (129) (53) (65) (15)

Provision (215) (277) (308) (331) (338)

Working capital 848 1,068 1,474 1,579 2,141

Total capital deployed 1,954 5,035 5,174 5,260 5,823Source: Company, Angel Research


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February 9, 2012 10

Cash flow statement (Consolidated, Indian GAAP)

Y/E March (` cr) FY2009 FY2010 FY2011 FY2012E FY2013EPre tax profit from operations 1,170 780 760 651 821

Depreciation 110 134 144 165 175

Expenses (deferred)/written off/others - (9) (98) 425 422

Pre tax cash from operations 1,280 906 805 1,241 1,418

Other income/prior period ad (38) 73 114 159 111

Net cash from operations 1,242 978 919 1,400 1,530

Tax (118) (144) (132) (172) (214)

Cash profits 1,124 834 788 1,228 1,315

(Inc)/dec in

Sundry Debtors 194 (140) (205) 22 (132)

Inventories - - 1 - -

Loans and advances 65 (377) (160) (51) (132)Sundry creditors (43) (8) 49 18 45

Others 5 (14) (45) 35 (39)

Net trade working capital 222 (539) (358) 24 (258)

Cashflow from operating activities 1,346 295 429 1,252 1,057(Inc)/dec in fixed assets (162) (407) 54 (175) (176)

(Inc)/dec in investments (371) (2,580) 107 36 2

(Inc)/dec in deferred tax asset, net (14) (8) (36) (11) (3)

Cashflow from investing activities (547) (2,995) 125 (149) (177)Inc/(dec) in debt (30) 2,135 (912) (316) (500)

Inc/(dec) in deferred revenue 584 (584) -

Inc/(dec) in equity/premium 3 5 (0) - -

Inc/(dec) in minority interest 0 3 2 - -

Addition to reserves on amalgamation (274) 288 (117) - -

Dividends (57) (50) (61) (74) (80)

Cashflow from financing activities (358) 2,381 (504) (974) (580)Cash generated/(utilized) 441 (320) 49 129 300

Cash at start of the year 98 538 219 267 395

Cash at end of the year 538 219 267 395 696Source: Company, Angel Research


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February 9, 2012 11

Key Ratios (Consolidated, Indian GAAP)

Y/E March FY2009 FY2010 FY2011 FY2012E FY2013EValuation ratio(x)P/E (on FDEPS) 8.5 12.3 13.4 7.8 7.6

P/CEPS 7.6 10.3 10.9 7.1 6.6

P/BVPS 4.4 3.0 2.6 2.0 1.6

Dividend yield (%) 0.6 0.5 0.6 0.6 0.6

EV/Sales 1.8 2.3 1.9 1.6 1.3

EV/EBITDA 6.6 9.3 9.5 9.8 7.9

EV/Total assets 12.4 11.4 13.1 12.4 11.3

Per share data(`)EPS (Fully diluted) 77.4 53.6 49.3 84.2 86.4

Cash EPS 86.2 64.0 60.3 93.0 99.7

Dividend 3.7 3.3 4.0 4.0 4.0Book value 149.0 221.4 257.0 328.9 409.2

Dupont analysisTax retention ratio (PAT/PBT) 0.9 0.8 0.9 1.3 1.2

Cost of debt (PBT/EBIT) 1.0 0.9 1.0 1.1 1.1

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

Asset turnover ratio (Sales/Assets) 6.8 5.0 7.1 7.5 8.3

Leverage ratio (Assets/Equity) 0.3 0.3 0.2 0.2 0.1

Operating ROE (%) 48.7 24.7 22.3 24.5 21.1

Return ratios (%)RoCE (pre-tax) 56.6 19.8 16.6 14.6 15.0

Angel RoIC 87.6 22.2 18.0 16.2 17.6

RoE 48.7 24.6 23.5 24.5 21.1

Turnover ratios(x) Asset turnover (fixed assets) 6.8 5.0 7.1 7.5 8.3

Receivables days 82 77 81 81 81

Payable days 56 49 43 42 41



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February 9 2012 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%)

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

tech mahindra result updated

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