BUY CMP: Rs. 962, Target Price: Rs. 1100
Tech Mahindra Ltd (TECMAH) has been one of the leaders in
providing end to end solution to the IT needs of the telecom vertical and
derives ~96% of its revenue from the telecom vertical. Its top client British
Telecom (BT) contributes 29% to revenues. The company was incorporated in 1986
as a joint venture between Mahindra & Mahindra and British Telecommunications
(BT). In 2009, Tech Mahindra acquired Satyam Computer Services Limited and
plans to merge it into Tech Mahindra in the next few months. TECHM has over
49,059 employees. The company’s revenues for the past twelve months stood at
INR 63.8bn (USD1.2bn).
IT Industry revenues are forecasted to grow by 12-13% over
FY13-14E and as a scale player TECMAH is expected to gradually increase its
share of the total pie largely through its merger with Satyam computers. Its
well-established practice, combined with recent acquisition of Hutchison Group
and Comviva, provides significant cross-selling opportunity, which could help
TECMAH win some of the large size deals.
Tech Mahindra + Mahindra Satyam = A formidable combination:
The merger of MSAT with TECMAH creates a formidable player with a client base
of 500 (TECMAH’s player, TECMAH s 140 and MSAT’s 368), which is similar to Tier
I companies. This opens up a plethora of opportunity for the combined entity to
increase the wallet share among a large base of clients. This will enable
significant operational synergies leading to improvement in margin.
Diversification, high non-BT growth key: TECMAH on a
standalone basis derives ~96% of revenues from telecom. Post the merger,
contribution of telecom will come down to 45%. Also, the geographical
concentration of Europe in TECMAH reduces from
45% to 35%. Moreover, TECMAH specialized telecom play has resulted in a robust
growth for the company in non-BT clients which is encouraging under current
environment.
Strong turnaround in the offing: Given the significant
margin performance by MSAT in the last few quarters (from 5.9% in Q2FY11 to
21.6% in Q3FY13) combined with a modest growth by TECHM amidst uncertainty in
telecom vertical gives us the comfort to forecast a revenue growth of 14%/10%
for FY14E/FY15E respectively (for the merged entity).
Disclaimer
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