Tech Mahindra, 1Q FY 2014
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Transcript of Tech Mahindra, 1Q FY 2014
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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
Tech MahindraPerformance Highlights
1QFY2014 Result Update | IT
August 19, 2013
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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
Source: Company, Angel Research
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
Source: Company, Angel Research
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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Tech Mahindra | 1QFY2014 Result Update
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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%
Source: Company, Angel Research
Exhibit 7:Trend in utilization rate
Source: Company, Angel Research
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
Source: Company, Angel Research
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
Source: Company, Angel Research
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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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
Source: Company, Angel Research
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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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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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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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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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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