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Tech Mahindra
Performance Highlights
(` cr) Net revenue EBITDA EBITDA margin (%) PAT* 1QFY12 1,292 242 18.7 180.3 4QFY11 % chg (qoq) 1,262 259 20.5 206 2.4 (6.6) (183)bp (13) 1QFY11 1,134 213 18.8 144 % chg (yoy) 14.0 13.5 (10)bp 24.8
ACCUMULATE
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code IT 9,457 0.9 813/539 58,339 10 16,730 5,035 TEML.BO TECHM.IN
`725 `783
12 months
Source: Company, Angel Research; Note:*Excludes share of profits from Mahindra Satyam
For 1QFY2012, Tech Mahindra reported mixed results. The companys revenue was almost in-line with our estimates, but its operating margin and core PAT came in below expectations. Growth came from the non-BT business yet again, which grew by 5.8% qoq with BT at 1.5% qoq due to cross-currency gain. BT has now started retendering its work; this poses risk to Tech Mahindras revenue run rate of 70mn72mn quarterly. However, due to the companys stake in Mahindra Satyam, we maintain our Accumulate view on the stock. Result highlights: For 1QFY2012, Tech Mahindra reported revenue growth of 4.1% qoq to US$289.8mn due to 2.0% qoq volume growth. In INR terms, revenue came in at `1,292cr, up 2.4% qoq. OPM slipped to 18.7%, down 183bp qoq, due to higher employee cost related to 1,638 employees (largely trainees) added in IT services, which pulled down utilisation by 300bp qoq to 71%. Outlook and valuation: The companys five-year multi-million dollar deals bagged in 4QFY2011 from Vodafone are expected to ramp up in from 2QFY2012. We expect the non-BT business to grow at a CQGR of 4.5% and 4.6% in FY2012E and FY2013E, respectively, with BTs quarterly revenue likely to be flat at US$116mn. Thus, we expect a 13.4% revenue CAGR over FY201113E. Core operating margin is expected to fall due to impending wage hikes and utilisation remaining a limited lever because of strong fresher hiring. Core EPS is expected to grow at a mere 1.5% CAGR over FY201113E. The only potential upside is due to the companys stake in Mahindra Satyam, which is improving its overall profitability (33% to PAT). We continue to value the company at 55% discount to Infosys target PE i.e., at 9x companys consolidated EPS of `87 and maintain an Accumulate rating with a target price of `783.
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 71.1 1.2 8.7 19.0
3m (8.8) 8.6
FY2009 4,465 18.6 1,014 27.2 77.4 9.4 4.9 48.7 56.6 2.0 7.3
FY2010 4,625 3.6 700 (30.9) 24.5 53.6 13.5 3.3 24.6 19.8 2.5 10.0
FY2011 5,140 11.1 643 (8.3) 19.5 49.4 14.7 2.8 22.3 16.6 2.0 10.4
FY2012E 5,364 4.4 1,072 66.8 17.1 81.2 8.9 2.2 24.7 14.5 1.9 10.9
FY2013E 6,001 11.9 1,147 7.1 17.0 87.0 8.3 1.8 21.2 14.6 1.5 9.0
Srishti Anand
+022 3935 7800 Ext: 6820 srishti.anand@angelbroking.com
Ankita Somani
+022 3935 7800 Ext: 6819 ankita.somani@angelbroking.com
Source: Company, Angel Research; Note: *Excludes share of profits from Mahindra Satyam
Source: Company, Angel Research; Note: *Excludes share of profits from Mahindra Satyam
(US $mn)
1QFY12
Revenue from the BT account grew by 1.5% qoq to US$116mn, primarily on account of USD appreciating against GBP. Management maintained its near-term guidance for the quarterly revenue run rate from the BT account to be at 70mn72mn. However, this revenue run rate may pose a downside risk, 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.
3QFY11
4QFY11
qoq growth
1QFY12
The companys revenue share from BPO services increased to 9.4% in 1QFY2012 from 8.0% and 6.3% in 4QFY2011 and 3QFY2011, respectively. This is due to revenue traction coming in from two major BPO deals signed by the company (one of Bharti Airtel for its Africa operations and the other in Philippines). However, revenue from TSPs, which contribute the most (~84%) to the companys revenue, stood almost flat qoq at `1,064.6cr, with 0.6% growth. Revenue from telecom equipment manufacturers (TEM) also increased by 6.4% qoq to `82.9cr.
(%)
The companys top 25 clients drove its growth in 1QFY2012, by registering 4.1% qoq revenue growth. Also, revenue from the companys top 610 clients grew by 4.1% qoq.
10
(%)
0 (5.0) (13.7) (20) 1QFY11 2QFY11 BT 3QFY11 Next 4 accounts 4QFY11 Next 5 accounts 1QFY12 (3.5)
(10)
Utilisations decline
During the quarter, utilisation level decreased by 300bp qoq to 71% from 74% in 4QFY2011. This was due to strong net employee additions of 4,517 in the company. Out of these, ~1,638 employees were added in IT services with majority of them as trainees out of 3,500 campus offers given this year. Maximum hiring was done on the BPO side, with net additions at 2,793, taking its total employee base to 13,804. Sales and support base scaled up by 86, taking the total employee base to 1,126. Attrition rate (annualised) of Tech Mahindra decreased to 20% in 1QFY2012 from 25% in 4QFY2011.
2,522 74
2,793
78 76
1,609
1,638
74 72
63
224
71
70 68
3QFY11
4QFY11
1QFY12
66 64
(1,600)
BPO professionals
Utilisation (%)
Continued focus on improvement of employee pyramid by adding more freshers has resulted in a decline in the pyramids bulge, with employees less than three years of experience increasing to ~38% from 33% (FY2011).
August 16, 2011
(%)
Margins slip
In 1QFY2012, Tech Mahindras gross margin and EBITDA margin declined by 277bp and 183bp qoq to 33.9% and 18.7% from 36.7% and 20.5% in 4QFY2011, respectively, due to higher intake of freshers to do pyramid rationalisation, thus impacting utilisation by 300bp and leading to lower margin. However, the decline in the companys EBITDA margin was lower because of SGA expense rationalisation.
40
34.2
36.5
34.9
36.7
33.9
(%)
30 18.8 21.7 18.9 10 15.6 1QFY11 2QFY11 Gross profit margin 20.6 20.5 18.7
20
17.5 4QFY11
16.1 1QFY12
EBIT margin
During the quarter, PAT, excluding share from Mahindra Satyam, stood at `180cr (vs. our expectation of `208cr), down 12.7% qoq. However, PAT, including share from Mahindra Satyam, stood at `276cr due to strong earnings from Mahindra Satyam, which boosted Tech Mahindras bottom line by `96cr.
Client pyramid
Tech Mahindras client pyramid saw a mixed movement with 1) one of the US$20mn25mn clients moving down to the US$10mn15mn bracket and 2) three clients from the US$2mn5mn bracket moving up to higher brackets (one moved to the US$10mn15mn bracket and two moved to the US$5mn10mn bracket). Further, two new clients were added directly to the US$1mn2mn bracket. The active client base of the company remained stagnant at 128 during the quarter.
Source: Company, Angel Research ; Note: *Excludes share of profits from Mahindra Satyam
(`)
1,000 700 400 100 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Price 23 18 Jul-10 Dec-10 May-11 8 4
13
Source: Company, Angel Research. Note: P/E includes share of profits from Mahindra Satyam 2Q FY2011 onwards.
Source: Company, Angel Research. Note: ^Valued on SOTP basis,* EPS CAGR includes earnings from Mahindra Satyam
FY2009 FY2010 FY2011 FY2012E FY2013E 4,465 2,638 1,827 40.9 612 13.7 1,215 27.2 110 2.5 1,106 24.8 3 (38) 1,065 118 11.1 947 67 0 1,014 947 77.4 4,625 2,871 1,754 37.9 622 13.4 1,133 24.5 134 2.9 999 21.6 218 75 856 144 16.8 712 (9) 3 700 709 53.6 5,140 3,403 1,737 33.8 734 14.3 1,003 19.5 144 2.8 860 16.7 100 117 877 132 15.0 746 44 (143) 4 643 786 49.4 5,364 3,641 1,724 32.1 807 15.1 916 17.1 150 2.8 766 14.3 87 268 947 215 22.7 732 343 3 1,072 1,072 81.2 6,001 4,134 1,867 31.1 847 14.1 1,020 17.0 169 2.8 850 14.2 54 214 1,011 232 23.0 778 372 3 1,147 1,147 87.0
10
FY2009 FY2010 FY2011 FY2012E FY2013E 1,170 110 1,280 (38) 1,242 (118) 1,124 194 0 65 (43) 5 222 1,346 (162) (14) (30) 3 0 (274) (57) (358) 441 98 538 780 134 (9) 906 73 978 (144) 834 (140) (0) (377) (8) (14) (539) 295 (407) (8) 2,135 5 3 288 (50) 2,381 (320) 538 219 760 144 (98) 805 114 919 (132) 788 (205) 1 (160) 49 (45) (358) 429 54 107 (36) 125 (912) 584 (0) 2 (119) (61) (506) 48 219 267 679 150 344 1,173 266 1,439 (215) 1,223 56 (26) 2 11 43 1,266 (201) (1) (8) (209) (316) (584) (0) (75) (975) 82 267 348 797 169 373 1,339 211 1,551 (232) 1,318 (141) (132) 48 (2) (227) 1,091 (206) (6) (211) (500) (81) (581) 299 348 647
11
FY2009 9.4 8.4 4.9 0.5 2.0 7.3 13.7 77.4 86.2 3.7 149.0 0.9 1.0 0.2 6.8 0.3 48.7 56.6 87.6 48.7 6.8 82 56
FY2010 13.5 11.3 3.3 0.5 2.5 10.0 12.3 53.6 64.0 3.3 221.4 0.8 0.9 0.2 5.0 0.3 24.7 19.8 22.2 24.6 5.0 77 49
FY2011 14.7 12.0 2.8 0.5 2.0 10.4 14.3 49.4 60.3 4.0 257.0 0.9 1.0 0.2 7.1 0.2 22.3 16.6 18.0 22.3 7.1 81 43
FY2012E 8.9 7.8 2.2 0.6 1.9 10.9 12.9 81.2 92.6 4.0 329.6 1.1 1.2 0.1 6.9 0.2 24.7 14.5 16.1 24.7 6.9 81 42
FY2013E 8.3 7.3 1.8 0.6 1.5 9.0 11.3 87.0 99.8 4.0 410.4 1.1 1.2 0.1 7.4 0.2 21.2 14.6 17.1 21.2 7.4 81 41
12
E-mail: research@angelbroking.com
Website: www.angelbroking.com
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered
Tech Mahindra No No No No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
13