Tech Mahindra. Institutional Equities. 2QFY19 Result Update ACCUMULATE

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1 Result Update Institutional Equities Tech Mahindra 31 October 18 Reuters: TEML.BO; Bloomberg: TECHM IN Margins Continue To Surprise; Revenues And DSOs Disappoint The performance of Tech Mahindra (TML) was mixed with revenue growth of.4% (our estimate was.5 %) in constant currency (CC) terms. Growth was mainly driven by Communication vertical, which was up 5.5% in QoQ terms and constituted ~42% of revenues. However, the enterprise side disappointed with HCI - an acquired company in healthcare space- showing US$4mn decline in revenues QoQ (from what seems to be an annual run-rate of ~US$16mn in 1QFY19). While TML had signaled this decline a few quarters ago, the magnitude surprised us. EBITDA margin at 18.8% was above our estimate of 16.9%. The 24bps QoQ margin expansion is on the back of: (1) Operational improvements - automation, growth in offshore-oriented communication business- 14bps (2) INR depreciation 8bps. (3) Lack of visa costs 6bps. TML indicates that margins will continue to improve gradually in 2H driven by automation and higher profitability in portfolio companies and IP/Comviva sales. Margin expansion in portfolio companies is going to be driven by a higher level of offshoring and scale benefits. Large deal TCV at ~US$55mn (net new) is the highest in the past four years. Of this ~US$3mn came from Communication vertical and the rest from Enterprise. Post results, we have increased our margin estimates while retaining revenues. However lower other income estimates lead to only a modest pickup in EPS in FY/FY21. We have lowered our rating on TML from Buy to Accumulate with a September 19 target price of Rs731. We have lowered our target multiple from 14.3x to 12.2x, which is at a 4% discount to the target multiple of TCS and reflects TML s structural weakness because of its less diversified revenue mix, higher client concentration, slower organic growth, lower margins, lower RoIC and behind-the-curve investments in automation and digital. We are particularly disappointed with growth on the Enterprise side of the business in what represents the best demand environment. We worry about downside to growth when developed market economies turn softer which we believe will happen in the next months. 5G hype looks premature: We believe the 5G network services opportunity is a 2HFY one or possibly even a FY21 one. The street, in our view, has got excited about it prematurely. Besides when that opportunity comes through, we believe OEMs like Ericsson, Huawei, Nokia, ZTE, etc will take the first shot at it and not necessarily TML. Our interactions in the past with TML and other Indian players indicate that 5G is likely to be more enterprise-centric rather than consumer-centric and therefore adoption may be slower than expected. With communication service providers (CSPs) in many countries not being in the best financial shape and not having fully recovered their investments in 3G and 4G, we believe they are likely to be very cautious in their spending on 5G. There could also be a situation where there could be pressure on legacy spending in the CSP world and repurposing savings to 5G. For TML, that could mean compression in a very large part of its extant revenues, while strong growth in a small part. We also believe that advantages of having LCC have diminished with the market shifting to software-defined networks. We believe this shift is likely to lead to higher competitive intensity with India-origin players like TCS, Wipro and HCL Technologies also becoming reasonable competitors. Deterioration in DSOs is a cause for concern: Against the days of DSOs (including unbilled), they shot up to 18 in 1QFY19 and 112 in. These are the highest among the Tier-1 India-based players. Typically, these have been in the range of 75-9 for its peers. About 2 days of the DSO deterioration has been explained by currency problems. ACCUMULATE Sector: Information Technology CMP: Rs685 Target price: Rs731 Upside: 7% Girish Pai Head of Research girish.pai@nirmalbang.com Key Data Current Shares O/S (mn) 98.9 Mkt Cap (Rsbn/US$bn) 67.5/ Wk H / L (Rs) 781/458 Daily Vol. (3M NSE Avg.) 3,991,95 Price Performance (%) 1 M 6 M 1 Yr Tech Mahindra (8.3) Nifty Index (6.8) (5.1) (1.7) Source: Bloomberg Y/E March (Rsmn) 2QFY18 1QFY19 YoY(%) QoQ (%) E Dev (%) Net Sales (USD mn) 1,179 1,224 1, (.5) 1,21.7 Net Sales 76,64 82,763 86, , Direct Cost 53,789 57,34 56, (.7) 58,487 (2.7) Gross Margin 22,275 25,423 29, , % of Sales SG&A 11,218 11,854 13, , % of Sales EBITDA 11,57 13,569 16, EBITDA Margin (%) Depreciation & Amortisation 2,653 2,88 2, EBIT 844 1,761 13, , EBIT Margin (%) Interest Other Income 3,223 1,114 1,751 (45.7) ,791 (2.3) PBT 11,241 11,57 14, , Exceptional Item (as Reported) Provision for Tax 2,847 2,457 3, , Effective Tax Rate Minority share in Profit / Loss PAT (Reported) 8,363 8,979 1, , Exceptional Item (Adj-post Tax) (118) (133) PAT (Adjusted) 8,363 8,861 1, , NPM (%)

2 Exhibit 1: Key financials Y/E March (Rsmn) FY17 FY18 FY19E FYE FY21E Revenue 291,48 37,73 359, , ,348 YoY (%) Gross Profit 85,747 92, ,61 135, ,967 % of sales EBIT 32,62 36,321 54,68 62,236 6,861 % of sales PAT 28,136 38,1 44,622 51,86 52,355 YoY (%) (9.7) FDEPS RoE (%) RoCE (%) RoIC (%) P/E (x) P/BV (x) Exhibit 2: Change in our estimates New Old Change (%) FY19E FYE FY21E FY19E FYE FY21E FY19E FYE FY21E INR/USD USD Revenue (USD mn) 4,989 5,422 5,324 4,994 5,422 5,325 (.1) (.) (.) Revenue (Rsmn) 359, , , , , ,374.2 (.) (.) EBIT (Rsmn) 54,68 62,236 6,861 5,73 58, 56, EBIT Margin (%) PAT (Rsmn) 44,431 51,86 52,355 44,67 51,149 5, EPS (Rs) View on Indian IT services sector: We turned tactically positive on Indian IT services sector in March 18 after having been negative on it for close to three years (see the report here). We also released an update recently (see link: Peaking Global Capex Cycle; Relatives Are The Only Positives). This change in stance has been driven by: (1) Modest growth pick-up because of a peaking developed market economic cycle in 18 that has also been boosted by US tax reforms. (2) Large underweight institutional positioning in the sector. (3) Near-term negative news flow on financials (a large overweight sector for institutions). (4) Better relative valuation (which is no longer as compelling as it was six months ago). (5) INR depreciation-related benefits. (6) Regular capital return to investors. When we upgraded the sector, 8% of the upward revision in target prices was because of P/E multiple expansion and only % came from a revision in earnings. However, after a highly anaemic INR depreciation versus the USD of 1.7% over FY15-FY18 (against a long-term annual depreciation of 5%-6% over the past 7 years), we believe the INR will start depreciating at its longterm rate of 5%-6% (at the least) in the next three years or FY18-FY21E. Thus, while we believe that revenue growth for the sector in USD terms will still be in the mid-single-digit territory in the foreseeable future, earnings growth will likely pick up pace to the mid-teen level over this time frame from a mid-single digit number over FY15-FY18. The higher P/E multiple will be supported by rebound in earnings growth, return ratios and high return of capital to shareholders. The structural pressure that we have been harping on since April 15 will continue to constrain USD revenue growth for the industry. These include value compression and cannibalisation from automation (which is reaching enterprise scale, in our view, countering the upside from digital projects which is also scaling up) and movement to cloud, and a weaker but improving competitive position in new areas, insourcing, etc. These pressures have led to growth pick-up being pushed back to the last stage of this economic upcycle. We believe that growth will be dispersed in FY19. In our coverage universe, we believe only TCS will witness any material pick-up in organic revenue growth in the Tier-1 space. We prefer large-caps over mid-caps at current valuations. Mid-caps may witness faster growth pick-up on a low base in FY19 (and from bombed-out margins in some cases), but would advise investors to focus on sustainability and not overpay for a riskier business model. Current valuations of midcap stocks factor in strong growth over a two to three-year time frame - which we believe is unlikely. 2 Tech Mahindra

3 Exhibit 3: Vertical-based USD QoQ and YoY revenue growth in Vertical Contribution to revenues (%) USD growth-qoq (%) USD growth-yoy (%) Communication (Telecom) (1.9) Manufacturing.1 (.5) 9.3 Technology,media & entertainment Banking,financial services & insurance 13.5 (1.2) (1.1) Retail, transport & logistics (6.7) Others 11.2 (16.8) 16.9 Total 1.1 (.4) 3.6 Source: Nirmal Bang Institutional Equities Research Exhibit 4: Geography- based USD QoQ and YoY revenue growth in Geography Contribution to revenues (%) USD growth-qoq (%) USD growth-yoy (%) North America 47. (3.) 7.2 Europe 29.6 (1.8) 1.9 Rest of World (2.1) Total 1. (.6) 3.3 Source: Nirmal Bang Institutional Equities Research analyst call highlights Key operating performance: Revenue growth in CC terms was.4% on QoQ basis. This was a combination of 5% growth in Communication vertical and ~3% decline on the Enterprise side. The latter suffered from drop in revenues of US$4mn in HCI the healthcare-related portfolio company. Ex-HCI, it was indicated that enterprise grew 3.5% QoQ. Such strong growth in Communication vertical is coming after almost four years. Revenues in in USD terms declined.5% on QoQ basis and grew 3.3% on YoY basis. Digital grew ~1% QoQ and constituted 31% of its revenues in versus 28% in 1QFY19. Strong margin expansion is a big surprise: EBITDA margin stood at 18.8%, an increase of a solid 24bps on QoQ basis and expansion of 43bps on YoY basis. Gross margin expanded 33bps QoQ and 47bps on YoY basis. SG&A costs, as a percentage of sales, increased 1bps QoQ and 6bps YoY to 15.3% in. Other income in increased by 57.2% on QoQ basis. The 24bps QoQ margin expansion is on the back of: (1) Operational improvements - automation, growth in offshore-oriented Communication business- 14bps. (2) INR depreciation - 8bps. (3) Lack of visa costs 6bps. TML indicated that margins will continue to improve gradually in 2HFY19 driven more by automation and higher profitability in portfolio companies and IP/Comviva sales. In a few of these portfolio companies, this is going to be driven by a higher level of offshoring and scale benefits. Commentary on Communication vertical: The revenues from this vertical account for ~42% of total revenues. They increased 4.3% QoQ and decreased 1.9% on YoY basis in USD terms. They grew 5% in CC terms. The management attributed the considerable growth to new deal wins. The management sounded positive on the trajectory going forward on the back of new deals wins and the pipeline. US$3mn TCV won in Communication vertical mostly centered around digital transformation and increasing operational efficiency of telecom companies. The sharp rise in BPO revenues and BPO employee base (QoQ) indicates that a large part of this growth in the telecom business came from rebadging of a large team of customer services representatives with elements of automation thrown in. Full-year guidance on Communication vertical growth is of flat to low single-digit growth. 5G outlook: The management maintained the same commentary in, as stated in 1QFY19, that: (1) 5G is not like what 4G was in the sense that the rollout and deployment of 5G is going to be nonuniform across geographies and among players within the same geography. No revenues are expected in FY19 and based on our reading of TML commentary in various analyst calls and meetings, it likely to be a material revenue generator more likely in FY21. Our interactions with TML also indicated that: (1) Work would be across the entire ecosystem comprising infrastructure, network, device etc, to make the power of 5G work. (2) The work in the pre-5g rollout phase is highly unique and includes working in areas like IoT, digital analytics, smart cities etc. (3) With respect to margin profile, TML stated that over the long run it has seen two telecom cycles and margins have improved in both the cycles. The management believes that the same would happen in the next cycle (5G rollout) on the back of 3 Tech Mahindra

4 investments that are being made currently and which were made in the past that will reap benefits in future. (4) Also, 5G as a matter of fact, is a lot more amenable to software-defined networks that will witness different adoptions as we go along. (5) The 5G technology will not only impact access network, core of the network, etc, but also have an impact on applications and underlying systems that will support, and will have to be integrated for 5G business. Hence, the 5G technology will definitely further the prospects of Communication business of TML. High TCV from Enterprise business: Out of US$55mn TCV, ~US$25mn has come from Enterprise business. Within the Enterprise business, the management stated that: (1) Manufacturing and Retail are showing traction, driven by Automobile & Aerospace. (2) Energy has picked up on the back of improvement in the oil and gas industry. (3) The company is also witnessing traction on the discretionary side where customers demand the use of digital technology to improve operational aspects of their business. In Enterprise services business, TML indicated 8%-1% growth in FY19. Nature of deal wins: The management stated that the deal wins are highly transformational in nature. The offerings are built on pillars such as: (1) Transformation of network infrastructure. (2) Transformation of underlying software architecture. (3) Offerings across Enterprise and Consumer markets. (4) Transforming and increasing operational efficiency of telecom players. (5) Humungous increase in data consumption. (6) Relationship with the accounts (telecom). Also, the management stated that deal wins were coming across all geographies and hence it was broad-based growth. Slowdown in Healthcare space: While the YoY growth has been decent at 16.9%, QoQ growth has been -16.8% in. The revenue growth reflected under this segment is from large implementation of healthcare software at some healthcare providers in the US. The implementation for around six to seven hospitals happened around the same time and the go-live also happened within a few months of one another leading to US$4mn hole in revenues. As with most cycles, there is always going to be a period when growth comes through because of implementation and there will be period of volatility till the next implementation starts. TML believes HCI can deliver 1% YoY growth while the revenues will be volatile on QoQ basis. TML indicated that revenues in HCI are unlikely to fall from here on. Margin levers: Margin improvement in has been mainly driven by: (1) INR depreciation. (2) Increased TCVs. (3) Decrease in direct costs. (4) Momentum from Digital vertical. Other conference-call highlights: (1) Attrition rate in stood at % against 19% in 1QFY19 and 16% in 2QFY18. (2) In, the company maintained the employee utilisation level (including trainees) of 81% compared to 1QFY18 and 2QFY18, respectively. (3)The management stated that TML was witnessing demand in cyber security services, primarily from banks and insurance companies.(4) The management gave tax rate guidance of 24%-25% on a normalised basis for FY19. (5) The management stated that a large part of sub-contractor expenses came from hiring onsite. It is currently at an industry elevated level of ~11%-12% 4 Tech Mahindra

5 1QFY14 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 1QFY13 2QFY14 3QFY14 1QFY17 4QFY14 1QFY15 2QFY17 2QFY15 3QFY15 3QFY17 4QFY15 1QFY16 4QFY17 2QFY16 3QFY16 1QFY18 4QFY16 1QFY17 2QFY18 2QFY17 3QFY17 3QFY18 4QFY17 1QFY18 4QFY18 2QFY18 3QFY18 1QFY19 4QFY18 1QFY19 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 1QFY14 1QFY13 2QFY14 3QFY14 1QFY17 4QFY14 1QFY15 Institutional Equities 2QFY17 2QFY15 3QFY15 3QFY17 4QFY15 1QFY16 4QFY17 2QFY16 3QFY16 1QFY18 4QFY16 1QFY17 2QFY18 2QFY17 3QFY17 3QFY18 4QFY17 1QFY18 4QFY18 2QFY18 3QFY18 1QFY19 4QFY18 1QFY19 Exhibit 5: Employee utilisation (including trainees) flat in (%) Exhibit 6: EBIT margin increases in substantially on the back of better gross margin (%) Gross margin SG&A as % of sales EBIT margin yy Exhibit 7: Software professional headcount increases marginally on QoQ basis (') Exhibit 8: Revenue contribution in terms of geographies (%) S/w Professionals BPO Professionals Sales & Support North America Europe Rest of World Exhibit 9: Attrition rate continues its sharp upturn Exhibit 1: TCV of large deals highest in the past four years (%) (US$mn) Tech Mahindra

6 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Institutional Equities Exhibit 11: >5mn bucket client number increases marginally in, but the number of >mn clients witness a decline on QoQ basis Million dollar + Clients 5 Million dollar + Clients 6 Tech Mahindra

7 Exhibit 12: Quarterly snapshot Year to 31 March (Rsmn) 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 INR/USD USD Revenue (USD mn) INR Revenue 68,837 69,9 71,674 75,575 74,95 73,361 76,64 77,76 8,545 82,763 86,298 Gross Margin 21,49,42 21,957 23,223,165,543 22,275 23,953 25,66 25,423 29,375 SGA 9,436 1,112 11,256 11,358 11,178 11,196 11,218 11,36 11,541 11,854 13,189 EBITDA 11,613 1,29 1,71 11,865 8,987 9,347 11,57 12,647 14,119 13,569 16,186 Depreciation 2,177 2,19 2,447 2,48 2,835 2,468 2,653 2,742 2,986 2,88 2,944 EBIT 9,436 8,271 8,254 9,385 6,152 6,879 8,44 9,95 11,133 1,761 13,242 Other income (net) 1,659 2,458 1,387 1,552 2,379 4,16 3,223 2,251 4,513 1,114 1,751 PBT 1,765 1,455 9,296 1,588 8,213 1,615 11,241 11,815 15,119 11,57 14,65 Tax 1,571 2,468 2,86 2,141 2,552 2,698 2,847 2,57 2,81 2,457 3,914 Minority Share in profit/loss (13) (11) 31 (68) 31 (187) Exceptional Item 12 (23) (2) (118) (133) PAT Reported 8,971 7,492 6,447 8,55 5,63 7,985 8,363 9,432 12,221 8,979 1,474 PAT Adjusted for exceptional items 8,961 7,51 6,448 8,548 5,63 7,985 8,363 9,432 12,221 9,72 1,571 YoY Growth (%) USD Revenue INR Revenue Gross Profit (4.2) EBITDA (2.8) 4.5 (22.6) (9.2) EBIT (8.7) (2.5) (34.8) (16.8) Net Profit (17.9) 12.6 (37.2) QoQ Growth (%) USD Revenue (1.6) (.48) INR Revenue (.8) (2.1) EBITDA 2.2 (11.4) (24.3) (3.9) 19.3 EBIT (1.9) (12.3) (.2) 13.7 (34.4) (3.3) 23.1 Net Profit 18.1 (16.5) (13.9) 32.6 (34.2) (26.5) 16.6 Margins (%) Gross Margin EBITDA EBIT PAT SGA Tech Mahindra

8 Exhibit 13: Key metrics Key Metrics 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 P and L (Rsmn) Revenue 66,155 67,11 68,837 69,9 71,674 75,575 74,95 73,361 76,64 77,76 8,545 82,763 86,298 EBITDA 11,1 11,358 11,613 1,29 1,71 11,865 8,987 9,347 11,57 12,647 14,119 13,569 16,186 PAT 7,855 7,593 8,971 7,492 6,447 8,55 5,63 7,985 8,363 9,432 12,221 8,979 1,474 Vertical Mix (%) Communication (Telecom) Manufacturing Technology, media & entertainment Banking, inancial services & insurance Retail, transport & logistics Others Geographical Mix (%) North America Europe Rest of World Delivery (%) Onsite Offshore Utilization (%) (including trainees) Clients Concentration (%) Top 5 Clients Top 1 Clients Top Clients Number of Client 1 USD mn USD mn USD mn USD mn USD mn Employees 15,235 17,137 15,432 17, , ,95 117, ,98 117, , ,87 113, ,391 Attrition (%) Financial Metrics (USD mn) Revenue EBITDA EBIT PAT Per Capita (Annualised) - USD Revenue 38,428 37,884 38,797 38,483 37,999 38,126 38,446 39,252 4,237 41,968 44,121 43,1 41,159 EBITDA 6,371 6,418 6,579 5,723 5,68 5,978 4,646 4,994 5,835 6,838 7,72 7,31 7,663 EBIT 5,223 5,436 5,353 4,6 4,383 4,728 3,191 3,673 4,433 5,356 6,67 5,569 6,257 PAT 4,569 4,342 5,2 4,425 3,412 4,26 3,38 4,235 4,422 5,2 6,716 4,713 5,68 8 Tech Mahindra

9 Exhibit 14: YoY and QoQ growth of various parameters QoQ Growth (%) 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 By Geography (%) North America (.9) (1.9) (1.3) (2.1) (3.) Europe (.8) 1.9 (1.) (.6) (.3) (1.8) Rest of World (5.7) (7.2) (2.2) (6.9) (6.9) 9.4 (3.3) 1.6 (6.3) 6.3 By Industry (%) Communication (Telecom) (4.2) 2.6 (2.7) (.) (2.5) (.8) (1.8).2.4. (6.4) 4.3 Manufacturing (1.8) 4.2 (.2) (.3) (.5) Technology,media & entertainment (1.9) (9.7) (9.4) (.2) (7.5) (1.8) (2.6) (3.).9 Banking,financial services & insurance (.9) 3.8 (1.1) 1.4 (1.9) (3.3) (1.2) Retail, transport & logistics (5.6) 13.7 (8.1) (13.3) (1.1) (3.2) 6. Others (3.1) (4.5) (16.8) By Client classification (%) Top 5 Clients 13.8 (5.) (5.).5 (.9) (12.2) (3.) (2.) (.8) (4.1) 2.9 (7.1) 5.9 Top 1 Clients 7.3 (1.3) (2.2) (1.7) (.1) (6.6) (1.7) (.8) (2.9).2 (3.) 1.4 (2.2).1 Top Clients 6.9 (.5) (.5).5.4 (6.8) (1.7) (.4) (1.3) (.1) 4.5 (.5) (1.8) YoY Growth By Geography (%) North America Europe (.6) Rest of World (.).7 (2.1) By Industry (%) Communication (Telecom) (4.4) (2.6) (3.) (.7) (2.) (1.2) (5.8) (1.9) Manufacturing (4.7) Technology,media & entertainment (6.2) (6.3) (2.9) (5.1) (6.9) (4.9) (8.6) (11.7) (9.9) Banking,financial services & insurance (1.1) Retail, transport & logistics (3.5) (6.7) Others By Client classification (%) Top 5 Clients (1.1) (16.9) (12.1) (9.) (5.5) (.8) (4.3) (9.6) (4.1) (9.1) (2.9) Top 1 Clients (5.3) (1.4) (9.9) (5.2) (1.6) (3.3) (6.3) (4.3) (3.7) (3.8) Top Clients (.1) (6.4) (5.4) (3.8) (2.1) (1.7) (3.5) Source: Nirmal Bang Institutional Equities Research 9 Tech Mahindra

10 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-13 Oct-16 Jan-14 Apr-14 Apr-17 Jul-14 Oct-17 Oct-14 Apr-18 Jan-15 Oct-18 Apr-15 Jul-15 Oct-11 Oct-15 Apr-12 Jan-16 Apr-16 Oct-12 Jul-16 Apr-13 Institutional Equities Oct-16 Oct-13 Jan-17 Apr-14 Apr-17 Oct-14 Jul-17 Apr-15 Oct-17 Oct-15 Jan-18 Apr-16 Apr-18 Jul-18 Oct-16 Oct-18 Apr-17 Oct-17 Apr-18 Oct-18 Exhibit 15: P/E charts (Rs) 1, 1, (x) Price P/E Mean 1sd (1)sd Exhibit 16:P/E premium/ (discount) to TCS (x) 1 (1) () (3) (4) (5) (6) Tech Mahindra 1 Yr Forward PE Discount to TCS -3 1 Tech Mahindra

11 Exhibit 17: Comparative valuation TCS Infosys Wipro HCL Tech TechMahindra Mindtree Persistent Year Ending March March March March March March March Prices as on 3-Oct-18 1, , Currency INR INR INR INR INR INR INR Market value (Rsbn) 7,254 2,867 1,617 1, (US$mn) 1,755 39,819 22,461 19,179 8,389 1, September 19 target price 2, , Upside/(downside) 12% 15% 11% 27% 7% -1% 12% Recommendation Accumulate Accumulate Buy Buy Accumulate Sell Accumulate FDEPS (Rs) FY FY19E FYE FY21E PE (x) FY FY19E FYE FY21E EV/EBITDA (x) FY FY19E FYE FY21E EV/Sales (x) FY FY19E FYE FY21E RoIC (%) FY FY19E FYE FY21E Source: Bloomberg, Nirmal Bang Institutional Equities Research 11 Tech Mahindra

12 Financials Exhibit 18: Income statement Y/E March (Rsmn) FY17 FY18 FY19E FYE FY21E Average INR/USD Net Sales (US$mn) 4,351 4,771 4,989 5,422 5,324 -Growth (%) (1.8) Net Sales 291,48 37,73 359, , ,348 -Growth (%) Cost of Sales & Services 5, , , , ,381 Gross Profit 85,747 92, ,61 135, ,967 % of sales SG& A 43,94 45,261 53,165 61,787 63,6 % of sales EBITDA 41,843 47,17 66,445 74,138 72,961 % of sales Depreciation 9,781 1,849 11,837 11,92 12,1 % of sales EBIT 32,62 36,321 54,68 62,236 6,861 % of sales Interest expenses 1,286 1,624 1,418 1, Other income (net) 7,776 14,93 6,292 8,144 9,94 PBT 38,552 48,79 59,482 69,133 69,789 -PBT margin (%) Provision for tax 1,21 1,925 14,531 16,938 17,98 Effective tax rate (%) Minority Interest 389 (136) Net profit 28,119 38,1 44,431 51,86 52,355 -Growth (%) (9.8) Net profit margin (%) Exhibit : Balance sheet Y/E March (Rsmn) FY17 FY18 FY19E FYE FY21E Equity capital 4,388 4,417 4,422 4,422 4,422 Reserves & surplus 159, ,11 4, , ,522 Net worth 164, ,428 9,5 242, ,944 Minority Interest 4,641 5,91 5,249 5,249 5,249 Other liabilities 18,95 18,246 18,27 18,27 18,27 Total loans 8,818 13,44 1,429 8,429 6,429 Total liabilities 196, ,5 243, ,862 36,892 Goodwill 26,279 27,727 29,828 29,828 29,828 Net block (incl. CWIP) 42,51 5,896 5,72 54,799 58,699 Investments 6,82 15,116 14,832 14,832 14,832 Deferred tax asset - net 2,674 5,766 8,25 8,25 8,25 Other non-current assets 19,594 23,797 29,69 32,743 32,215 Other current assets 21,571 19,623 25,266 27,94 27,49 Debtors 53,377 64,979 81,621 84,949 83,58 Loans & Advances 33,68 3,917 35,315 39,53 38,423 Cash & bank balance 54,98 64,892 63,135 88,34 117,43 Inventory Total current assets 163, ,7 6,182 24, ,769 Total current liabilities 63,929 79,167 96,24 16,187 14,476 Net current assets 99,336 11,93 11, , ,293 Total assets 196, ,5 243, ,862 36,892 Exhibit 19: Cash flow Y/E March (Rsmn) FY17 FY18 FY19E FYE FY21E EBIT 32,62 36,321 54,68 62,236 6,861 (Inc.)/dec. in working capital (9,1) 8,227 (1,12) Cash flow from operations 22,942 44,548 44,596 62,658 61,598 Other income 7,776 14,93 6,292 8,144 9,94 Depreciation & amortisation 9,781 1,849 11,837 11,92 12,1 Financial expenses (1,286) (1,624) (1,418) (1,246) (975) Tax paid (1,21) (1,925) (14,531) (16,938) (17,98) Dividends paid (13,47) (9,48) (14,835) (18,741) (21,781) Net cash from operations 16,145 47,893 31,941 45,779 43,747 Capital expenditure (19,449) (21,142) (11,643) (16,) (16,) Net cash after capex (3,34) 26,751,298 29,779 27,747 Inc./(dec.) in debt (145) 3,963 (2,987) (2,) (2,) (Inc.)/dec. in investments 18,498 (15,69) (7,787) (3,133) 528 Equity issue/(buyback) (451) Cash from financial activities 17,93 (11,617) (1,769) (5,133) (1,472) Others (638) (4,34) (11,287) 254 3,121 Opening cash 4,138 54,98 64,892 63,135 88,34 Closing cash 54,98 64,892 63,134 88,34 117,43 Change in cash 13,961 1,794 (1,758) 24,9 29,396 Exhibit 21: Key ratios Y/E March FY17 FY18 FY19E FYE FY21E Per Share (Rs) FDEPS Dividend Per Share Dividend Yield (%) Book Value Dividend Payout Ratio (%. Incl DDT) Return ratios (%) RoE RoCE ROIC Tunover Ratios Asset Turnover Ratio Debtor Days Working Capital Cycle Days Valuation ratios (x) PER P/BV EV/EBITDA EV/Sales M-cap/Sales Tech Mahindra

13 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Jan-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Jan-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 13 April 15 Sell May 15 Sell June 15 Sell July 15 Sell September 15 Sell November 15 Sell December 15 Sell January 16 Under Review February 16 Under Review March 16 Sell May 16 Sell June 16 Sell August 16 Sell October 16 Sell January 17 Sell January 17 Sell February 17 Sell March 17 Sell May 17 Sell June 17 Sell August 17 Sell September 17 Sell November 17 Sell December 17 Sell December 17 Under Review January 18 Under Review March 18 Accumulate May 18 Accumulate July 18 Accumulate July 18 Accumulate October 18 Buy October 18 Accumulate Rating track graph Not Covered Covered 13 Tech Mahindra

14 DISCLOSURES This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) for private circulation. NBEPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 14 having Registration no. INH1436. NBEPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. NBEPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBEPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBEPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBEPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBEPL or its associates or Analyst or his relatives do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBEPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBEPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBEPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: I, Mr. Girish Pai, research analyst, is the author of this report, hereby certifies that the views expressed in this research report accurately reflects my personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 14 Tech Mahindra

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