tech mahindra, 7th february, 2013

7/29/2019 Tech Mahindra, 7th February, 2013

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

EBITDA 376 338 11.4 234 60.6

EBITDA margin (%) 21.0 20.7 31bp 16.2 479bp

Source: Company, Angel Research; Note:*exclude one-offs

For 3QFY2013, Tech Mahindra reported a strong set of results for 3QFY2013,with operating performance ahead of our expectations. The EBITDA marginincrease despite the lower margin profile of the two acquired companies, wasencouraging. 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. Theramp-up on the recently won deals will lend visibility to revenue growth and isexpected to offset the decline in revenues from BT.

For 3QFY2013, Tech Mahindra reported USD revenue ofUS$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 `1,791cr, up 9.8% qoq.The EBITDA margin grew by 31bp qoq to 21.0%, majorly because of headcountrationalization which led to improvement in utilization level also. The PAT came inat `276cr, down 7% qoq, negatively impacted by lower profits from its associatecompany Mahindra Satyam. During the quarter, Mahindra Satyam paid

`294cr towards settlement of legal claims of Aberdeen.

The Management indicated that the overall IT spending inthe telecom vertical is expected to remain flat and it expects to see market sharegains through higher cost optimization initiatives at client levels. The ramp ups onthe recently won deals will lend visibility to revenue growth. We believe theincreased traction in non-British Telecom (BT) accounts and consolidation of HGS(US$170mn annual revenue run rate) and Comviva (~US$70mn annual revenuerun rate) will offset the decline in BT and will drive growth going forward. Weexpect 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 overFY2012-14. Taking the new share count of 23.08cr shares (post merger ofTech Mahindra and Mahindra Satyam) into account, the consolidated EPS comes

in at `92.2.

Key financials (Consolidated, Indian GAAP)

% chg 3.6 11.1 6.8 23.7 12.1

% chg (30.9) (8.3) 70.4 16.2 15.7

EBITDA margin (%) 24.5 19.5 16.7 21.0 19.6

P/E (x) 18.3 19.9 11.1 10.2 8.8

P/BV (x) 4.4 3.8 3.2 2.5 2.0

RoE (%) 24.6 23.5 28.7 24.3 22.3

RoCE (%) 19.8 16.9 13.1 17.6 15.5

EV/Sales (x) 3.2 2.7 2.5 1.9 1.7

EV/EBITDA (x) 13.0 13.6 14.9 9.3 8.4

Source: Company, Angel Research

CMP `979

Target Price `1,105

Investment Period 12 months

Stock Info

Sector

Net debt (` cr) 836

Bloomberg Code

Shareholding Pattern (%)

Promoters 47.5

MF / Banks / Indian Fls 22.2

FII / NRIs / OCBs 20.1Indian Public / Others 10.2

Abs. (%) 3m 1yr 3yr

Sensex 4.4 10.9 24.4

Tech Mahindra 1.7 51.7 4.9

10

19,640

5,959

TEML.BO

TECHM.IN

12,767

0.6

1043/579

114,618

IT

Avg. Daily Volume

Market Cap (` cr)

Beta

52 Week High / Low

Face Value (`)

BSE Sensex

Nifty

Reuters Code

+91 22 3935 7800 Ext: 6819

[email protected]

Performance Highlights

3QFY2013 Result Update | IT

February 6, 2013


2/12

Tech Mahindra | 3QFY2013 Result Update

February 6, 2013 2

Exhibit 1:3QFY2013 performance (Consolidated, Indian GAAP)

Cost of revenue 1,125 1,034 8.8 986 14.0 3,127 2,747 13.8Gross profit 667 598 11.5 459 45.3 1,839 1,323 39.0

SG&A expense 290 260 11.6 225 29.3 795 643 23.6

Dep. and amortization 51 48 5.0 39 29.5 141 123 14.3

EBIT 326 290 12.5 195 66.8 904 557 62.2

Interest 26 23 34 73 90

Other income 30 (64) 15 (51) 119

PBT 330 203 62.5 176 87.0 779 587 32.8

Income taxes 81 25 221.9 29 174.8 164 120 37.5

PAT 249 178 40.0 147 69.4 615 467 31.6

Minority interest 7 - 2 7 4

Profit from associates 34 119 132 303 329

Exceptional item - - - - -

Diluted EPS 20.7 22.3 (7.2) 20.9 (0.9) 68.6 60.1 14.1

Gross margin (%) 37.2 36.6 57bp 31.8 546bp 37.0 32.5 453bp

EBITDA margin (%) 21.0 20.7 31bp 16.2 479bp 21.0 16.7 432bp

EBIT margin (%) 18.2 17.8 44bp 13.5 467bp 18.2 13.7 451bp

PAT margin (%) 15.4 18.2 (276)bp 19.1 (370)bp 18.3 19.5 (114)bp


Exhibit 2:3QFY2013 Actual vs Angel estimates

Net revenue 1,791 1,755 2.1

EBITDA margin (%) 21.0 19.3 166bp

PAT* 242 195 24.0

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

Robust performance

For 3QFY2013, Tech Mahindra reported USD revenue of US$329.4mn, up 10.1%

qoq, aided by acquisition of HGS and Comviva. HGS contributed ~US$37mn to

the revenues while Comviva contributed US$6mn (19 days contribution) during the

quarter. On an organic basis, revenues remained almost flat qoq with BT being

the biggest dragger. USD revenues from non-BT accounts grew by ~16.7% qoq to

US$234mn, aided by acquisitions. On an organic basis, the non-BT business grew

by 2% qoq, which is decent considering that 3Q has traditionally been a soft

quarter for IT companies. Revenue from BT declined by 3.3% qoq. In INR terms,

the revenue came in at `1,791cr, up 5.7% qoq.

The Management indicated the possibility of further decline in revenues from BT

accounts going forward for the next couple of quarters because of continued

restructuring activity in BT, though the quantum of decline in BT will only be clearer


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February 6, 2013 3

in the coming quarters. While the revenue run rate from BT has declined in the

recent quarters, the actual base revenue run rate for BT post decline will be clear

post the restructuring activity is over.

Tech Mahindra announced five key deal wins during the quarter, with a combined

TCV of US$100m.

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


Exhibit 4:Revenue trend for BT account


During the quarter, the companys revenue from telecom service providers (TSPs;

~71% contribution to revenue) grew by 0.6% qoq to `1,268cr, and revenue from

telecom equipment manufacturers (TEMs; ~6% contribution to revenue) grew by

2.4% qoq to `109cr.

Utilization level inches up

The companys overall headcount declined by 1,420 employees, despite 1,546employee additions from Comviva, with the companys total headcount standing at

49,059. This was because of continuous decline in business from BT, exit from

lower margin domestic BPO business along with headcount rationalization.

188

177 180

200

234

0.6

(5.5)

1.5

11.3

16.7

(8)

(4)

0

4

8

12

16

20

120

140

160

180

200

220

240

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

(%)

(US$mn)

Non BT qoq growth

101

104

101

99

96

(7.8)

3.1

(2.8)

(2.5)

(3.3)

(10)

(8)

(6)

(4)

(2)

0

2

4

90

92

94

96

98

100

102

104

106


(%)

(US$mn)

BT qoq growth


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February 6, 2013 4

The Management indicated that the company will continue with its just-in-time

hiring policy and will hire laterals on a need basis. BPO headcount declined by

2,438 employees to 22,565. The headcount decline drove the companys

utilization level by ~200bp qoq to 76% in 3QFY2013.

Exhibit 5:Trend in utilization rate


Operating margin surprises positively

In 3QFY2013, the companys EBITDA margin grew by 31bp qoq to 21.0%

(significantly ahead of our estimates as we had expected a 135bp qoq decline),

despite having a negative impact from the lower margin profile of the two

acquisitions done recently. This was majorly because of headcount rationalization

which led to improvement in utilization level also. Also, Tech Mahindras

continuous cost optimization measures and focus on improving profitability from

lower performing projects aided margins.

Exhibit 6:Margin trend


(1,447)

(385) (65) (544)

785544

(1,627)

(184)

10,395

(2,438)

73

74 74 74

76

70

72

74

76

78

(4,000)

(2,000)

0

2,000

4,000

6,000

8,000

10,000

12,000


(%)

Netadditionno.

S/w professionals BPO professionals Utilization (%)

31.8

34.4

37.3 36.6 37.2

16.2 16.8

21.4 20.7 21.0

13.5

14.2

18.7

17.8

18.2

10

15

20

25

30

35

40


(%)

Gross profit margin EBITDA margin EBIT margin


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February 6, 2013 5

Client pyramid

The active client base of the company stood at 140. The companys top 2-5 clients

drove its growth in 3QFY2013 by registering 30.4% qoq USD revenue growth,

aided by HGS. The company added one client in US$50mn+ revenue bracket.

Exhibit 7:Client metrics

US$1mn2mn 22 22 18 16 19

US$2mn5mn 13 10 10 14 14

US$5mn10mn 13 13 14 15 12

US$10mn15mn 6 6 6 5 6

US$15mn20mn 2 2 1 0 0

US$20mn25mn 3 2 2 1 1

US$25mn50mn 2 3 3 3 2US$50mn+ 2 2 2 3 4

Active clients 130 130 130 126 140


Exhibit 8:Trend in revenue growth of top clients (qoq)


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 company announced five deal wins during 3QFY2013 with a TCV of ~US$

100mn and continues to chase 5-6 large deals in the pipeline, though closure

velocity remains unchanged. The Management witnessed that the decision making

cycle continues to remain elongated and decision making continues to beextremely slow as customers scrutinize every aspect of expenditure. The ramp ups

on the recently won deals will lend visibility to revenue growth and are expected to

offset the decline in revenues from BT. Tech Mahindras managed services focus

(7.8)

3.1

(2.8)(2.5)

(3.3)

0.63.6

8.7 9.2

30.4

(2.5)

(12.2)

(0.1)

65.5

(13.5)(20)

(10)

0

10

20

30

40

50

60

70


(%)

BT Next 4 accounts Next 5 accounts


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February 6, 2013 6

has helped the company close a large number of deals through FY2013, which

will start ramping up from 4QFY2013 onwards and lend visibility to better growth

in FY2014. We believe the increased traction in non-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.

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. Also, full quarter revenues from Comviva from 4QFY2013 could have

an impact on profitability. However, the company has maintained strong focus on

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

There remains some scope for further rationalization, which could partially cushion

the decline. The PAT is expected to be supported by 1) the deep in-the-moneyhedges of 260mn and US$570mn with participation rates at 86.0 INR/GBP and

54.1 INR/USD, boosting forex gains for the company; and 2) healthy Mahindra

Satyams earnings. We expect a 27.3% and 15.9% CAGR in EBITDA and PAT of

Tech Mahindra over FY2012-14. PAT of Tech Mahindra and Satyam for FY2014

are expected to be at `902cr and `1,335cr respectively. 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 `92.2.

Exhibit 9:Key assumptions

Revenue growth (US$) 7.9 13.0

USD-INR rate (realized) 54.4 54.0

Revenue growth (`) 23.7 12.1

EBITDA margin (%) 21.0 19.6

Tax rate (%) 21.4 26.0

EPS growth (%) 8.7 15.5


Exhibit 10:Change in estimates

Net revenue 6,671 6,789 1.8 7,290 7,609 4.4

EBITDA 1,323 1,423 7.5 1,386 1,490 7.5

PBT 966 1,083 12.2 1,170 1,219 4.2

Tax 213 240 13.1 304 317 4.2

PAT 1,248 1,273 2.0 1,410 1,472 4.4



7/12


February 6, 2013 7

Exhibit 11:One-year forward PE (x)

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

2QFY2011 onwards.

Exhibit 12:Recommendation summary

HCL Tech Accumulate 670 765 14.2 20.7 12.7 13.6 1.5 22.9

Hexaware Buy 78 118 51.8 19.0 7.3 6.3 0.8 22.0

Infosys Neutral 2,774 - - 28.8 16.0 5.9 2.9 21.3

Infotech Enterprises Accumulate 163 184 13.0 17.4 8.4 10.3 0.5 13.6KPIT Cummins Buy 112 140 25.4 15.2 8.7 16.9 0.7 20.5

Mahindra Satyam Accumulate 116 126 8.2 19.8 10.3 3.7 1.2 23.7

MindTree Accumulate 790 868 9.9 19.3 9.1 17.4 0.9 21.7

Mphasis Accumulate 363 396 9.1 17.5 9.6 0.0 0.7 13.5

NIIT^ Buy 26 36 37.7 10.9 4.2 (2.7) 0.1 14.1

Persistent Neutral 532 - - 24.1 9.9 15.1 1.1 18.0

TCS Accumulate 1,371 1,465 6.9 28.9 17.3 13.3 3.5 29.7

Wipro Accumulate 405 429 6.0 19.4 14.6 6.8 1.7 17.9

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

100

400

700

1,000

1,300

1,600

1,900

2,200

2,500

Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12

(`)

Price 23 18 13 8 4


8/12


February 6, 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 ~37% 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)

Cost of revenues 2,871 3,403 3,678 4,279 4,940

1,754 1,737 1,811 2,510 2,669

% of net sales 37.9 33.8 33.0 37.0 35.1

SG&A expenses 622 734 892 1,087 1,179% of net sales 13.4 14.3 16.3 16.0 15.5

% of net sales 24.5 19.5 16.7 21.0 19.6

Dep. and amortization 134 144 161 194 221

% of net sales 2.9 2.8 2.9 2.9 2.9

EBIT 999 860 758 1,230 1,269

% of net sales 21.6 16.7 13.8 18.1 16.7

Interest expense 218 100 103 103 84

Other income, net of forex 75 117 98 (44) 34

Profit before tax 856 877 753 1,083 1,219

Provision for tax 144 132 144 240 317

% of PBT 16.8 15.0 19.1 22.2 26.0

Recurring PAT 712 746 610 843 902

Share from associates 44 557 437 570

Exceptional item (9) (143) (68) - -

Minority interest 3 4 4 7 -

Fully diluted EPS (`) 53.6 49.3 88.2 95.8 110.7


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February 6, 2013 9

Balance sheet (Consolidated, Indian GAAP)

Equity capital 122 126 128 128 128

Preference capital - - - - -Share premium 237 260 270 270 270

Profit and loss 1,783 2,198 2,998 4,182 5,550

Other reserves 744 768 655 655 655

Secured loans 750 640 600 500 400

Unsecured loans 1,385 543 527 551 449

Total debt 2,135 1,183 1,127 1,051 849

Other long term liability - 392 430 480 510

Long-term provisions - 146 189 209 209

Minority interest 14 16 - - -

Gross block 1,131 1,287 1,514 1,670 1,870

Accumulated depreciation (527) (670) (832) (1,025) (1,246)

Net block 604 617 683 645 624

Capital WIP 321 61 167 197 227

Investments 3,015 2,870 3,427 3,956 4,510

Deferred tax asset, net 28 64 100 140 170

Long term loans and adv. - 415 338 338 338

Inventories 1 1 0 0 0

Sundry debtors 1,042 1,036 1,317 1,451 1,626

Cash and cash equivalents 219 267 242 622 1,031

Loans and advances 673 726 645 794 890

Sundry creditors (461) (247) (365) (367) (419)

Other liabilities (129) (558) (608) (600) (600)

Provision (277) (162) (151) (204) (228)

Working capital 1,068 1,061 1,081 1,696 2,300


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February 6, 2013 10

Cash flow statement (Consolidated, Indian GAAP)

Pre tax profit from operations 780 760 655 1,127 1,185

Depreciation 134 144 161 194 221Expenses (deferred)/written off/others (9) (99) 557 437 570

Pre tax cash from operations 906 804 1,374 1,758 1,976

Other income/prior period ad 73 114 95 (51) 34

Net cash from operations 978 918 1,468 1,707 2,010

Tax (144) (132) (144) (240) (317)

Cash profits 834 786 1,324 1,466 1,693

(Inc)/dec in

Sundry debtors (140) 6 (281) (134) (175)

Inventories (0) 1 0 - -

Loans and advances (377) (53) 81 (149) (96)

Sundry creditors (8) (214) 118 3 52

Others (14) 315 38 45 25

Net trade working capital (539) 55 (44) (235) (195)

(Inc)/dec in fixed assets (407) 104 (333) (186) (230)

(Inc)/dec in investments (2,580) 145 (557) (529) (554)

(Inc)/dec in other non current assets (8) (305) 83 (20) (30)

Inc/(dec) in debt 2,135 (952) (56) (76) (202)

Inc/(dec) in deferred revenue 392 38 50 30

Inc/(dec) in equity/premium 5 27 12 - -

Inc/(dec) in minority interest 3 2 (16) - -

Addition to reserves on amalgamation 288 (144) (394) - -

Dividends (50) (61) (82) (89) (103)

Cash generated/(utilized) (320) 48 (25) 381 409

Cash at start of the year 538 219 267 242 622


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February 6, 2013 11

Key Ratios (Consolidated, Indian GAAP)

P/E (on FDEPS) 18.3 19.9 11.1 10.2 8.8P/CEPS 15.3 16.2 10.3 8.9 7.7

P/BVPS 4.4 3.8 3.2 2.5 2.0

Dividend yield (%) 0.3 0.4 0.4 0.4 0.4

EV/Sales 3.2 2.7 2.5 1.9 1.7

EV/EBITDA 13.0 13.6 14.9 9.3 8.4

EV/Total assets 15.9 20.2 16.1 15.7 14.8

EPS 53.6 49.3 88.2 95.8 110.7

Cash EPS 64.0 60.3 95.3 110.2 127.2

Dividend 3.3 4.0 4.0 4.0 4.0

Book value 221.4 257.0 307.2 393.4 496.3

Tax retention ratio (PAT/PBT) 0.8 0.9 1.5 1.2 1.2

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

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

Asset turnover ratio (Sales/Assets) 5.0 7.6 6.5 8.1 8.9

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

Operating ROE (%) 24.7 22.3 27.0 24.3 22.3

RoCE (pre-tax) 19.8 16.9 13.1 17.6 15.5

Angel RoIC 22.2 18.1 14.1 20.0 18.4

RoE 24.6 23.5 28.7 24.3 22.3

Asset turnover (fixed assets) 5.0 7.6 6.5 8.1 8.9

Receivables days 77 74 78 78 78


12/12


February 6 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

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

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tech mahindra, 7th february, 2013

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