Tech Mahindra. 4QFY17 Result Update. Short term blip, compelling valuation. Sector: Technology CMP: ` 429. Recommendation: Buy

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1 Tech Mahindra 4QFY17 Result Update Short term blip, compelling valuation Sector: Technology CMP: ` 429 Recommendation: Buy Market statistics Current stock price (`) 429 Shares O/S (cr.) 97.1 Mcap (` cr) 41,817 52W H/L (`) 564/358 6m avg. volume 2,953,015 Bloomberg TECHM IN Shareholding pattern Promoters Domestic Institution Foreign Institution Non-institution 13.7 of which more than 1% First State Investments Icvc 4.91 LIC of India 3.62 Tech Mahindra vs Nifty Tech Mahindra Capital efficiency & valuations Nifty 70 May-16 Sep-16 Jan-17 May-17 Particulars FY17 FY18E FY19E RoE (%) EPS (`) CEPS (`) P/E (x) P/BV (x) EV/EBITDA (x) Income growth (%) EBITDA growth (%) (2.0) PAT growth (%) (7.1) ANALYST Naushil Shah naushil.shah@trustgroup.co.in Tech Mahindra s 4QFY17 result was lower-than-expectation operationally, both on the revenue and margin front. TechM reported revenues at US$1,131mn (up 1.4% QoQ, up 0.9% in cc terms). Adjusted OPM (without one-off item) decreased by 190bps QoQ to 13.8% on account of legacy issues, and INR appreciation. PAT was dented by lower margin but helped by higher OI. Management indicates a healthy pipeline and pick up in spending primarily in the US and improving funnel in manufacturing. We continue to believe in Tech Mahindra s depth of capabilities in Telecom vertical as well as other verticals. Also, due to its legacy, Tech Mahindra has developed capabilities in Mobility and Cloud space which act as door-openers in new client accounts, while its depth of services help it increases penetration in existing accounts. We maintain our Buy recommendation on the stock. Results lower-than expected: TechM reported revenue of US$1,131mn (up 1.4% QoQ, up 0.9% in cc terms). Margin performance was disappointing; with EBITDA margin dipping 371bps to 12.0%. This was owing to a one-time cost of US$20mn related to restructuring of loss-making contracts in LCC (~180bps impact). Another ~140bps impact was on account of a legacy project, while 40bps was lost on account of INR appreciation. We believe EBITDA margin has more or less bottomed out, and will improve, led by (1) LCC stability (2) Higher utilisation and (3) Automation. Software Professionals stood at 82,403, BPO at 28,414 and Support staff at 6,876 (Net employees joining TECHM 598 QoQ to 117,693 employees). Management cites healthy pipe line, both US and Europe to do well for the company going forward. TechM remains confident of improving revenue growth citing healthy deal pipeline along with pick up in discretionary spending primarily in the US and improving funnel in Europe. Deal pipeline is up YoY. Network deal has potentially increased the addressable market opportunity in Telecom. Growth remains the primary focus, margins may see headwinds from onsite-centric revenue going forward. At the same time, Tech Mahindra is consistently increasing the addressable spend within clients' IT budgets. Other highlights: BFSI and Manufacturing: Manufacturing/BFSI registered healthy growth of 5.8/9.1% respectively. BFSI growth was highest in the last several quarters. Telecom (ex-lcc restructuring impact) grew ~2.1% QoQ, while Retail was down 13.3% QoQ, owing to structural challenges. Acquisition-related: LCC has an annual revenue rate of around USD 250mn, which could further fall to US$ mn after restructuring. Client metrics: Top-5/10 clients revenue was down 3.0% and 0.8% respectively, and growth came in from # Top 6-10 clients (+5.2% QoQ). TECHM is confident of regaining lost market share based on investments made. Near-term outlook: Growth will be challenged in 1Q, on account of LCC restructuring and seasonally weak quarter for Comviva. Margins will be under pressure, owing to the full quarter impact of wage hike and visa costs. We expect margins to improve from 2Q and see an uptick in 2HFY18. Valuation and Outlook: We expect TECHM to grow its USD revenues at a CAGR of 11% over FY17-19 during this period (1) share gains in existing customers, new client penetration, and successful execution in new areas such as network services (NSM) in telecom, and (2) large deal wins in enterprise vertical. We believe that Tech Mahindra has hit an execution sweet spot and identified white spaces (network management, end-to-end offerings in manufacturing segment) that will drive sustained revenue growth. Multiples can rerate if the company improves working capital management, ensuring solid FCF generation. We maintain our Buy recommendation on the stock.

2 Exhibit 1: Quarterly details ` mn 4QFY16 3QFY17 4QFY17 QoQ (%) YoY (%) Comments Revenues (In US$mn) 1,023 1,116 1, Revenues 68,837 75,575 74,950 (0.8) 8.9 Top-5/10 clients revenue was down 3.0% and 0.8% respectively, and growth came in from # Top 6-10 clients (+5.2% QoQ). - Operating costs 57,327 63,710 65, EBITDA 11,510 11,865 8,987 (24.3) (21.9) EBITDA margin (%) (371)bps (473)bps Adjusted OPM (without one-off item) decreased by 190bps QoQ to 13.8% on account of legacy issues, and INR depreciation. - Interest expense (8.9) (6.5) - Depreciation ,480 2, Other income, net (incl forex) 1,603 1,552 2, PBT 10,599 10,588 8,212 (22.4) (22.5) - Taxes 1,806 2,141 2, Tax rate to remain in the range of ~24% for FY18. Effective tax rate (%) bps 1,116bps PAT 8,793 8,447 5,896 (30.2) (32.9) - Minority interest (225) 111 (17) NA NA Consolidated PAT 8,568 8,558 5,879 (31.3) (31.4) Net margin (%) (348) (460) Reported profits 8,581 8,560 5,879 (31.3) (31.5) Exhibit 2: Change in estimates ` mn FY18E FY19E Old New %Chg Old New %Chg Revenue (US$ mn) 4,985 4,858 (2.5) 5,549 5,376 (3.1) Revenue 329, ,612 (2.6) 366, ,815 (3.1) EBITDA margin (%) (120)bps (40)bps EPS (`) (10.4) (3.0) Source: Trust Research Exhibit 3: Geographical wise Performance Geographical mix Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 North America Europe RoW Total Exhibit 4: Operating mix (%) Details Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Onsite Offshore Utilisation (incl. trainees)

3 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Tech Mahindra 4QFY17 Result Update 29 May 2017 Human Resources: Software Professionals stood at 82,403, BPO at 28,414 and Support staff at 6,876 (Net employees joining TECHM 598 QoQ to 117,693 employees). Exhibit 5: Employee strength at TECHM Details Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Software Professionals 72,952 71,997 71,657 71,892 72,125 73,590 78,404 80,858 82,403 BPO employees 22,693 24,394 26,513 28,279 27,254 27,326 27,669 29,372 28,414 Sales & Support 7,636 7,282 7,065 6,966 6,053 6,300 6,813 6,865 6,876 Total employees 103, , , , , , , , ,693 Client Concentration: The company lost 2 clients QoQ in the US$20mn+ and added 6 in the US$10mn+ to take the clients total to 36 and 71 respectively. Top-5/10 clients revenue was down 3.0% and 0.8% respectively, and growth came in from # Top 6-10 clients (+5.2% QoQ). Exhibit 6: Client details Vertical Mix Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 No. of Active Clients > $1 million clients > $5 million clients > $10 million clients > $20 million clients > $50 million clients Top 5 clients (%) Top 10 clients (%) Top 20 clients (%) Exhibit 7: Vertical-wise breakup Employees Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Telecom Manufacturing Technology, Media & Ent BFSI Retail, Transport & Logistics Others Total Exhibit 8: DSO days decreased 7 days QoQ (incl. unbilled rev) 115 DSO (Days) Exhibit 9: Utilization to be used as a margin lever Utilisation - including trainees (%) Utilisation - excluding trainees (%) , Trust, Trust

4 Exhibit 10: TECHM lost 2 and gained 6 clients QoQ in the US20mn+ and US$10mn+ bracket , Trust > $1 million clients > $5 million clients > $10 million clients > $20 million clients > $50 million clients Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

5 Financials Income Statement (` mn) Year End-March FY15 FY16 FY17 FY18E FY19E Revenues 224, , , , ,815 Op. Expenses 183, , , , ,109 EBITDA 41,144 42,707 41,843 47,359 55,706 Other Income 1,006 5,015 7,775 8,412 9,212 Depreciation 6,079 7,589 9,781 11,610 12,074 EBIT 36,071 40,133 39,837 44,161 52,843 Interest , PBT 35,774 39,163 38,551 43,189 52,351 Tax 9,472 8,183 9,785 10,365 12,564 PAT 26,302 30,979 28,766 32,823 39,787 Minority (24) 26 (357) (68) (68) Adj Pat 26,278 31,006 28,386 32,755 39,719 Key Parameters Year End-March FY15 FY16 FY17 FY18E FY19E Per share (`) EPS CEPS BVPS DPS Payout (%) Valuation (x) P/E P/BV EV/EBITDA Dividend Yield (%) Return ratio (%) EBIDTA Margin PAT Margin ROAE ROACE Leverage Ratios (x) Long Term D/E Net Debt/Equity (0.3) (0.3) (0.2) (0.3) (0.3) Debt/EBITDA Interest Coverage Current ratio Growth Ratios (%) Income growth EBITDA growth (1.7) 5.3 (2.0) PAT growth (10.6) 20.0 (7.1) Turnover Ratios F.A Turnover x Debtors Days Payable days Balance Sheet (` mn) Year End-March FY15 FY16 FY17E FY18E FY19E Equity Share Capital 4,804 4,839 4,870 4,890 4,910 Reserves & Surplus 129, , , , ,932 Total Shareholders Fund 134, , , , ,842 Minority Interest 1,601 1,927 4,641 4,641 4,641 Non- current liabilities 1,100 3,428 12,745 13,252 14,386 Long term Borrowings 460 1,966 3,853 3,853 3,853 Deferred tax liabilities (3,901) (5,322) (2,579) (2,579) (2,579) Other LT liabilities & prov 4,541 6,784 11,471 11,978 13,112 Current Liabilities 57,086 56,357 63,929 69,730 75,539 Short-term borrowings 6,286 8,055 8,342 8,342 8,342 Trade payables 20,587 22,758 23,117 25,454 27,862 Other cur liabilities & Prov 30,213 25,544 32,470 35,935 39,335 Total Liabilities 194, , , , ,408 Assets Non- current Assets 72,054 70,064 94,726 98, ,801 Fixed assets 27,717 30,635 35,457 37,457 39,457 Non-current investments 31,276 20,475 35,181 35,181 35,181 Long-term loans & adv 12,755 2,910 4,329 4,392 4,860 Other non-current assets ,044 19,759 21,960 24,302 Current assets 122, , , , ,607 Current investments 8,041 11,248 21,647 21,647 21,647 Trade receivables 52,059 57,705 53,377 58,852 65,130 Inventories Cash & bank balances 24,049 23,978 20,013 33,638 51,424 Short-term loans & adv 18,728 24,455 33,608 36,892 40,828 Other current assets 19,404 32,072 34,009 37,771 41,800 Total Assets 194, , , , ,408 Cash flow Statement Year End-March FY15 FY16 FY17 FY18E FY19E PBT 35,774 39,163 38,551 43,189 52,351 Depreciation 6,008 6,168 12,524 11,610 12,074 Interest Exp , Others (24) 26 (380) (68) (68) CF before W.cap 42,055 46,328 51,981 55,703 64,850 Inc/dec in W.cap 22,374 30, ,568 10,187 Op CF after W.cap 19,681 15,981 51,849 47,135 54,662 Less Taxes 9,472 8,183 9,785 10,365 12,564 Net CF From Operations 10,209 7,797 42,064 36,770 42,098 Inc/(dec) in F.A + CWIP 11,675 10,507 14,603 13,610 14,074 (Pur)/sale of Investments 18,113 (7,594) 25, Others (297) (970) (1,286) (972) (492) CF from Invst Activities (30,085) (3,884) (40,994) (14,582) (14,566) Loan Raised/(repaid) 6,222 3,275 2, Equity Raised 11,299 6,328 3, Dividend 6,745 13,588 10,256 8,582 9,766 CF from Fin Activities 10,776 (3,985) (5,035) (8,562) (9,746) Net inc /(dec) in cash (9,100) (71) (3,965) 13,625 17,786 Op. bal of cash 33,202 24,049 23,978 20,013 33,638 Cl. balance of cash 24,049 23,978 20,013 33,638 51,424 5

6 Institutional Equity Team Names Designation Sectors ID's Desk-Number Naren Shah Head Of Equity Sales Trading & Dealing Rajesh Ashar Sales Trader Dealing Desk Research Team Binyam Taddese Analyst Rates & Credit Research Naushil Shah Analyst Technology, Media & Telecom Tushar Chaudhari Analyst Commodities, Auto & Mid-caps Ritu Chaudhary Associate Consumer Durable

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