2QFY2013 Result Update IT November 5, 2012 Tech Mahindra Performance Highlights (` cr) 2QFY13 1QFY13 % chg (qoq) 2QFY12 % chg (yoy) Net revenue 1,631 1,543 5.7 1,333 22.4 EBITDA 338 330 2.3 204 65.4 EBITDA margin (%) 20.7 21.4 (69)bp 15.3 538bp Adj. PAT* 296 339 (12.5) 240 23 ; Note:*exclude one-offs For 2QFY2013, Tech Mahindra reported healthy set of results which were in-line with the expectations on the revenue front but the operational performance of the company exceeded our as well as the street s expectations. We believe the increased traction in non-bt accounts and consolidation of Hutchison Global Services (HGS, US$170mn annual revenue run rate) and Comviva (~US$70mn annual revenue run rate) will offset the decline in BT and will drive growth going forward. We maintain Accumulate rating on the stock. Result highlights: For 2QFY2013, Tech Mahindra reported USD revenue of US$299mn, up 6.4% qoq, aided by acquisition of HGS (continued US$13mn). In INR terms, revenue came in at `1,631cr, up 5.7% qoq. Despite having ~150bp qoq wage hike impact, the company s EBITDA margin declined by only 69bp qoq to 20.7%, aided by continuous cost optimization measures. The PAT came in at `296cr, down 12.5%, impacted by ~`69cr forex loss. 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. The company expects to close some of the managed services opportunities in 3QFY2013. Also, the deal pipeline looks healthy in the US and emerging markets. But the management witnessed that the decision making cycle has become elongated and decision making continues to be extremely slow as customers scrutinize every aspect of expenditure. We expect a CAGR of 10.1% and 14.1% in USD and INR revenue over FY2012-14E. We expect a 19.5% and 11.1% CAGR in EBITDA and PAT of Tech Mahindra over FY2012-14E. PAT of Tech Mahindra and Satyam for FY2014 are expected to be at `830cr and `1,225cr respectively. Taking the new share count of 23.08cr shares (post merger of Tech Mahindra and Mahindra Satyam) into account, the consolidated EPS comes in at `89.0. We value Tech Mahindra at 12x FY2013E EPS of `89.0 and maintain Accumulate rating on the stock with a target price of `1,070. Key financials (Consolidated, Indian GAAP) Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E FY2014E Net sales 4,625 5,140 5,490 6,603 7,150 % chg 3.6 11.1 6.8 20.3 8.3 Net profit 700 643 1,095 1,232 1,353 % chg (30.9) (8.3) 70.4 12.5 9.8 EBITDA margin (%) 24.5 19.5 16.7 19.8 18.4 EPS (`) 53.6 49.3 88.2 92.9 102.0 P/E (x) 17.8 19.4 10.8 10.3 9.4 P/BV (x) 4.3 3.7 3.1 2.4 2.0 RoE (%) 24.6 23.5 28.7 23.7 21.0 RoCE (%) 19.8 16.9 13.1 16.2 14.0 EV/Sales (x) 3.1 2.6 2.4 1.9 1.7 EV/EBITDA (x) 12.7 13.3 14.5 9.8 9.4 ACCUMULATE CMP `955 Target Price `1,070 Investment Period 12 months Stock Info Sector IT Market Cap (` cr) Net debt (` cr) 10,705 606 Beta 52 Week High / Low 0.7 1043/537 Avg. Daily Volume 88,536 Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code 10 18,763 5,704 TEML.BO TECHM.IN Shareholding Pattern (%) Promoters 56.7 MF / Banks / Indian Fls 18.7 FII / NRIs / OCBs 15.1 Indian Public / Others 9.5 Abs. (%) 3m 1yr 3yr Sensex 9.1 6.8 16.8 Tech Mahindra 25.4 52.8 2.6 Ankita Somani +91 22 3935 7800 Ext: 6819 ankita.somani@angelbroking.com Please refer to important disclosures at the end of this report 1
Exhibit 1: 2QFY2013 performance (Consolidated, Indian GAAP) (` cr) 2QFY13 1QFY13 % chg (qoq) 2QFY12 % chg (yoy) 1HFY13 1HFY12 % chg (yoy) Net revenue 1,631 1,543 5.7 1,333 22.4 3,175 2,626 20.9 Cost of revenue 1,034 968 6.7 907 14.0 2,002 1,761 13.7 Gross profit 598 575 4.0 426 40.2 1,173 865 35.6 SG&A expense 260 245 6.3 222 17.1 505 419 20.5 EBITDA 338 330 2.3 204 65.4 668 446 49.8 Dep. and amortization 48 42 14.3 51 (5.1) 90 84 7.3 EBIT 290 288 0.5 153 88.7 578 362 59.7 Interest 23 24 33 47 56 Other income (64) (17) 59 (81) 105 PBT 203 247 (17.8) 179 13.5 450 411 9.5 Income taxes 25 59 (57.1) 39 (36.1) 84 90 (7.3) PAT 178 188 (5.6) 139 27.5 366 320 14.2 Minority interest - - 1-1 PAT after minority interest 178 188 (5.6) 139 27.9 366 319 14.6 Profit from associates 119 150 102 269 198 Exceptional item - - - - - Reported PAT 296 339 (12.5) 240 23.2 635 517 22.8 Adj. PAT 296 339 (12.5) 240 23.2 635 517 22.8 Diluted EPS 22.3 25.5 (12.5) 18.2 22.6 47.8 39.2 22.1 Gross margin (%) 36.6 37.3 (61)bp 32.0 466bp 36.9 32.9 401bp EBITDA margin (%) 20.7 21.4 (69)bp 15.3 538bp 21.0 17.0 406bp EBIT margin (%) 17.8 18.7 (91)bp 11.5 624bp 18.2 13.8 442bp PAT margin (%) 10.9 12.2 (130)bp 10.4 47bp 11.5 12.2 (63)bp Exhibit 2: 2QFY2013 Actual vs. Angel estimates (` cr) Actual Estimate Var. (%) Net revenue 1,631 1,615 1.0 EBITDA margin (%) 20.7 19.8 92bp PAT* 178 208 (14.5) ; Note: *Excludes share of profits from Mahindra Satyam Healthy performance For 2QFY2013, Tech Mahindra reported USD revenue of US$2993mn, up 6.4% qoq, aided by acquisition of HGS. HGS contributed ~US$13mn to the revenues (one-month contribution). On organic basis, revenues grew by 1.6% qoq. USD revenues from non-bt accounts grew by ~4% qoq (organic basis) while revenue from BT declined by 2.5% qoq. In INR terms, the revenue came in at `1,631cr, up 5.7% qoq. The management indicated the possibility of further decline in the revenues from BT account going forward because of continued restructuring activity in BT, though the quantum of decline in BT will only be clearer in the coming quarters. While the revenue run rate from BT has declined in the recent quarters, Tech Mahindra s share of BT s wallet has gone up by ~2% during the restructuring period. November 5, 2012 2
Tech Mahindra announced two large deal wins during the quarter, both in Europe, one with a TCV of US$100m and the other from UK ranging between US$70-80m. Exhibit 3: Trend in revenue growth for non-bt accounts 210 16 200 190 200 11.3 12 (US $mn) 180 170 160 150 7.3187 188 0.6 177 180 1.5 8 4 0 (%) 140 130 120 (5.5) 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 (4) (8) Non BT qoq growth Exhibit 4: Revenue trend for BT account 115 4 3.1 2 (US $mn) 110 105 110 104 (2.8) (2.5) 0 (2) (4) (%) 100 (5.5) 101 (7.8) 101 99 (6) (8) 95 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 BT qoq growth (10) During the quarter, the company s revenue from telecom service providers (TSPs) (~77% contribution to revenue) grew by 1.6% qoq to `1,260cr, while revenue from telecom equipment manufacturers (TEMs; ~6% contribution to revenue) declined by 2.4% qoq to `102cr. Utilization level flat The company s utilization level remained almost flat qoq to 74% in 2QFY2013. The company s overall headcount (organic basis excluding HGS) declined for the fourth consecutive quarter, as a result of rationalization in domestic employees and due to closures in certain projects. The management indicated that the company will continue with its just-in-time hiring policy and will hire laterals on a need basis. Including HGS, the overall headcount grew by 9,849 employees, taking its total employee base to 50,479. November 5, 2012 3
Exhibit 5: Trend in utilization rate 12,000 10,000 8,000 74 74 Net addition no. 6,000 73 4,000 72 2,000 2,071 544 0 (385) (65)(184) (2,000) (1,255) (1,447) (1,627) 74 10,395 (544) 76 74 72 70 (%) 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 S/w professionals BPO professionals Utilization (%) Operating margin surprises positively In 2QFY2013, despite having ~150bp qoq wage hike impact on operating margins, the company s EBITDA margin decline by only 69bp qoq to 20.7%. Tech Mahindra s operating margins were aided by continuous cost optimization measures and focus on improving profitability from lower performing projects. HGS integration also negatively impacted operating margins by ~30bp qoq. From 3QFY2012, full quarter impact of HGS will flow in. This will again have some negative impact on operating margins of the company as HGS (being a BPO) has margins that are lower than the company s average margins. Exhibit 6: Margin trend 40 35 32.0 31.8 30 34.4 37.3 36.6 (%) 25 20 15 10 21.4 20.7 15.3 16.2 16.8 17.8 18.7 11.5 13.5 14.2 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 Gross profit margin EBITDA margin EBIT margin November 5, 2012 4
Client pyramid The active client base of the company stood at 126. The company s top 5-10 clients drove its growth in 2QFY2013 by registering 65.5% qoq USD revenue growth, aided by HGS. The company added one client in US$50mn+ revenue bracket. Exhibit 7: Client metrics Particulars 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 US$1mn 2mn 19 22 22 18 16 US$2mn 5mn 14 13 10 10 14 US$5mn 10mn 13 13 13 14 15 US$10mn 15mn 6 6 6 6 5 US$15mn 20mn 2 2 2 1 0 US$20mn 25mn 2 3 2 2 1 US$25mn 50mn 2 2 3 3 3 US$50mn+ 2 2 2 2 3 Active clients 128 130 130 130 126 Exhibit 8: Trend in revenue growth of top clients (qoq) 70 65.5 60 50 40 (%) 30 20 13.6 10 9.3 3.13.6 0.6 8.7 9.2 0 (2.8) (0.1) (10) (2.5) (5.5) (7.8) (20) (12.2) (2.5) 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 BT Next 4 accounts Next 5 accounts 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 and expects to close some of the managed services opportunities in 3QFY2013. Also, the deal pipeline looks healthy in the US and emerging markets. But the management witnessed that the decision making cycle has become elongated and decision making continues to be extremely slow as customers scrutinize every aspect of expenditure. We believe the increased traction in Non-BT accounts and consolidation of HGS (US$170mn annual revenue run rate) and Comviva (~US$70mn annual revenue run rate) will offset the decline in BT and will drive growth going forward. We expect a CAGR of 10.1% and 14.1% in USD and INR revenue over FY2012-14E. November 5, 2012 5
The PAT is expected to be supported by 1) the deep in-the-money hedges of 260mn and US$570mn with participation rates at 86.0 INR/GBP and 54.1 INR/USD, boosting forex gains for the company; and 2) healthy Mahindra Satyam s earnings. We expect a 19.5% and 11.1% CAGR in EBITDA and PAT of Tech Mahindra over FY2012-14E. PAT of Tech Mahindra and Satyam for FY2014 are expected to be at `830cr and `1,225cr respectively. Taking the new share count of 23.08cr shares (post merger of Tech Mahindra and Mahindra Satyam) into account, the consolidated EPS comes in at `89.0. We value Tech Mahindra at 12x FY2013E EPS of `89.0 and maintain Accumulate rating on the stock with a target price of `1,070. Exhibit 9: One-year forward PE (x) 2,500 2,200 1,900 1,600 (`) 1,300 1,000 700 400 100 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Price 23 18 13 8 4. Note: P/E includes share of profits from Mahindra Satyam 2QFY2011 onwards. Exhibit 10: Recommendation summary Company Reco CMP Tgt Price Upside FY2014E FY2014E FY2011-14E FY2014E FY2014E (`) (`) (%) EBITDA (%) P/E (x) EPS CAGR (%) EV/Sales (x) RoE (%) HCL Tech Accumulate 613 648 5.7 18.1 12.8 10.1 1.5 22.0 Hexaware Buy 113 135 19.4 21.1 9.2 11.1 1.2 24.1 Infosys Accumulate 2,379 2,573 8.2 30.4 13.9 5.6 2.7 23.1 Infotech Enterprises Neutral 194 202 4.1 17.3 9.6 11.6 0.7 14.0 KPIT Cummins Accumulate 122 132 8.0 15.0 10.1 14.5 0.9 19.8 Mahindra Satyam Accumulate 109 115 5.4 18.8 10.5 0.7 1.1 22.9 MindTree Accumulate 656 747 13.8 17.7 8.8 11.6 0.8 19.7 Mphasis Neutral 393 392 (0.4) 16.9 10.5 (0.5) 0.8 12.6 NIIT^ Accumulate 34 36 6.8 11.0 5.3 (1.5) 0.3 14.3 Persistent Neutral 482 485 0.7 24.6 8.9 15.1 1.0 17.9 TCS Accumulate 1,329 1,410 6.1 29.1 17.4 12.0 3.6 29.1 Tech Mahindra* Accumulate 955 1070 12.0 18.4 9.4 5.0 1.7 21.0 Wipro Buy 363 421 16.0 20.0 12.9 7.4 1.5 17.9. Note: ^Valued on SOTP basis,* EPS CAGR includes earnings from Mahindra Satyam November 5, 2012 6
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 still it derives ~37% 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) FY2010 FY2011 FY2012 FY2013E FY2014E Net sales 4,625 5,140 5,490 6,603 7,150 Cost of revenues 2,871 3,403 3,678 4,278 4,801 Gross profit 1,754 1,737 1,811 2,326 2,350 % of net sales 37.9 33.8 33.0 35.2 32.9 SG&A expenses 622 734 892 1,019 1,037 % of net sales 13.4 14.3 16.3 15.4 14.5 EBITDA 1,133 1,003 919 1,307 1,313 % of net sales 24.5 19.5 16.7 19.8 18.4 Dep. and amortization 134 144 161 193 207 % of net sales 2.9 2.8 2.9 2.9 2.9 EBIT 999 860 758 1,114 1,106 % of net sales 21.6 16.7 13.8 16.9 15.5 Interest expense 218 100 103 109 94 Other income, net of forex 75 117 98 (39) 117 Profit before tax 856 877 753 966 1,129 Provision for tax 144 132 144 218 299 % of PBT 16.8 15.0 19.1 22.6 26.5 Recurring PAT 712 746 610 748 830 Share from associates 44 557 485 523 Exceptional item (9) (143) (68) - - Minority interest 3 4 4 - - Profit aft minority interest 700 643 1,095 1,232 1,353 Adjusted PAT 709 786 1,163 1,232 1,353 Fully diluted EPS (`) 53.6 49.3 88.2 92.9 102.0 November 5, 2012 7
Balance sheet (Consolidated, Indian GAAP) Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E FY2014E Equity capital 122 126 128 128 128 Preference capital - - - - - Share premium 237 260 270 270 270 Profit and loss 1,783 2,198 2,998 4,144 5,402 Other reserves 744 768 655 655 655 Net worth 2,887 3,351 4,051 5,197 6,455 Secured loans 750 640 600 500 400 Unsecured loans 1,385 543 527 482 303 Total debt 2,135 1,183 1,127 982 703 Other long term liability - 392 430 480 510 Long-term provisions - 146 189 209 209 Minority interest 14 16 - - - Total capital employed 5,035 5,088 5,796 6,867 7,875 Gross block 1,131 1,287 1,514 1,670 1,870 Accumulated depreciation (527) (670) (832) (1,025) (1,232) Net block 604 617 683 645 638 Capital WIP 321 61 167 197 227 Total fixed assets 925 678 850 842 865 Investments 3,015 2,870 3,427 3,956 4,510 Deferred tax asset, net 28 64 100 140 170 Long term loans and advances - 415 338 338 338 Inventories 1 1 0 0 0 Sundry debtors 1,042 1,036 1,317 1,411 1,528 Cash and cash equivalents 219 267 242 582 858 Loans and advances 673 726 645 773 837 Sundry creditors (461) (247) (365) (377) (416) Other liabilities (129) (558) (608) (600) (600) Provision (277) (162) (151) (198) (215) Working capital 1,068 1,061 1,081 1,590 1,992 Total capital deployed 5,035 5,088 5,796 6,867 7,875 November 5, 2012 8
Cash flow statement (Consolidated, Indian GAAP) Y/E March (` cr) FY2010 FY2011 FY2012E FY2013E FY2014E Pre tax profit from operations 780 760 655 1,005 1,012 Depreciation 134 144 161 193 207 Expenses (deferred)/written off/others (9) (99) 557 485 523 Pre tax cash from operations 906 804 1,374 1,683 1,742 Other income/prior period ad 73 114 95 (39) 117 Net cash from operations 978 918 1,468 1,643 1,859 Tax (144) (132) (144) (218) (299) Cash profits 834 786 1,324 1,425 1,560 (Inc)/dec in Sundry debtors (140) 6 (281) (94) (117) Inventories (0) 1 0 - - Loans and advances (377) (53) 81 (128) (64) Sundry creditors (8) (214) 118 12 39 Others (14) 315 38 39 16 Net trade working capital (539) 55 (44) (170) (126) Cashflow from operating activities 295 841 1,280 1,256 1,434 (Inc)/dec in fixed assets (407) 104 (333) (186) (230) (Inc)/dec in investments (2,580) 145 (557) (529) (554) (Inc)/dec in other non current assets (8) (305) 83 (20) (30) Cashflow from investing activities (2,995) (57) (807) (735) (814) Inc/(dec) in debt 2,135 (952) (56) (144) (279) Inc/(dec) in deferred revenue 392 38 50 30 Inc/(dec) in equity/premium 5 27 12 - - Inc/(dec) in minority interest 3 2 (16) - - Addition to reserves on amalgamation 288 (144) (394) - - Dividends (50) (61) (82) (87) (95) Cashflow from financing activities 2,381 (736) (498) (181) (344) Cash generated/(utilized) (320) 48 (25) 340 276 Cash at start of the year 538 219 267 242 582 Cash at end of the year 219 267 242 582 858 November 5, 2012 9
Key Ratios (Consolidated, Indian GAAP) Y/E March FY2010 FY2011 FY2012E FY2013E FY2014E Valuation ratio (x) P/E (on FDEPS) 17.8 19.4 10.8 10.3 9.4 P/CEPS 14.9 15.8 10.0 8.9 8.1 P/BVPS 4.3 3.7 3.1 2.4 2.0 Dividend yield (%) 0.3 0.4 0.4 0.4 0.4 EV/Sales 3.1 2.6 2.4 1.9 1.7 EV/EBITDA 12.7 13.3 14.5 9.8 9.4 EV/Total assets 15.5 19.7 15.7 15.3 14.2 Per share data (`) EPS 53.6 49.3 88.2 92.9 102.0 Cash EPS 64.0 60.3 95.3 107.5 117.7 Dividend 3.3 4.0 4.0 4.0 4.0 Book value 221.4 257.0 307.2 391.9 486.8 Dupont analysis Tax retention ratio (PAT/PBT) 0.8 0.9 1.5 1.3 1.2 Cost of debt (PBT/EBIT) 0.9 1.0 1.0 0.9 1.0 EBIT margin (EBIT/Sales) 0.2 0.2 0.1 0.2 0.2 Asset turnover ratio (Sales/Assets) 5.0 7.6 6.5 7.8 8.3 Leverage ratio (Assets/Equity) 0.3 0.2 0.2 0.2 0.1 Operating ROE (%) 24.7 22.3 27.0 23.7 21.0 Return ratios (%) RoCE (pre-tax) 19.8 16.9 13.1 16.2 14.0 Angel RoIC 22.2 18.1 14.1 18.3 16.3 RoE 24.6 23.5 28.7 23.7 21.0 Turnover ratios( x) Asset turnover (fixed assets) 5.0 7.6 6.5 7.8 8.3 Receivables days 77 74 78 78 78 November 5, 2012 10
Research Team Tel: 022-3935 7800 E-mail: research@angelbroking.com Website: www.angelbroking.com DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. 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 Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to -15%) Sell (< -15%) November 5, 2012 11