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 36.21 Domestic Institution 13.40 Foreign Institution 36.69 Non-institution 13.7 of which more than 1% First State Investments Icvc 4.91 LIC of India 3.62 Tech Mahindra vs Nifty 120 110 100 90 80 Tech Mahindra Capital efficiency & valuations Nifty 70 May-16 Sep-16 Jan-17 May-17 Particulars FY17 FY18E FY19E RoE (%) 17.2 17.6 18.6 EPS (`) 32.4 37.1 44.8 CEPS (`) 43.5 50.3 58.5 P/E (x) 14.1 11.6 9.6 P/BV (x) 2.3 1.9 1.7 EV/EBITDA (x) 7.7 6.0 4.8 Income growth (%) 10.0 10.0 10.7 EBITDA growth (%) (2.0) 13.2 17.6 PAT growth (%) (7.1) 14.1 21.2 ANALYST Naushil Shah +91-22 4224 5125 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$200-250mn after restructuring. Client metrics: Top-5/10 clients revenue was down 3.0% and 0.8% respectively, and growth came in from # Top 6-10 clients (+5.2% QoQ). TECHM is confident of regaining lost market share based on investments made. Near-term outlook: Growth will be challenged in 1Q, on account of LCC restructuring and seasonally weak quarter for Comviva. Margins will be under pressure, owing to the full quarter impact of wage hike and visa costs. We expect margins to improve from 2Q and see an uptick in 2HFY18. Valuation and Outlook: We expect TECHM to grow its USD revenues at a CAGR of 11% over FY17-19 during this period (1) share gains in existing customers, new client penetration, and successful execution in new areas such as network services (NSM) in telecom, and (2) large deal wins in enterprise vertical. We believe that Tech Mahindra has hit an execution sweet spot and identified white spaces (network management, end-to-end offerings in manufacturing segment) that will drive sustained revenue growth. Multiples can rerate if the company improves working capital management, ensuring solid FCF generation. We maintain our Buy recommendation on the stock.
Exhibit 1: Quarterly details ` mn 4QFY16 3QFY17 4QFY17 QoQ (%) YoY (%) Comments Revenues (In US$mn) 1,023 1,116 1,131 1.4 10.6 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 65,963 3.5 15.1 EBITDA 11,510 11,865 8,987 (24.3) (21.9) EBITDA margin (%) 16.7 15.7 12.0 (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 340 349 318 (8.9) (6.5) - Depreciation 2174 2,480 2,835 14.3 30.4 + Other income, net (incl forex) 1,603 1,552 2,378 53.2 48.3 PBT 10,599 10,588 8,212 (22.4) (22.5) - Taxes 1,806 2,141 2,316 8.2 28.2 Tax rate to remain in the range of ~24% for FY18. Effective tax rate (%) 17.0 20.2 28.2 798bps 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 (%) 12.4 11.3 7.8 (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 329,039 320,612 (2.6) 366,213 354,815 (3.1) EBITDA margin (%) 16.0 14.8 (120)bps 16.1 15.7 (40)bps EPS (`) 41.4 37.1 (10.4) 46.2 44.8 (3.0) Source: Trust Research Exhibit 3: Geographical wise Performance Geographical mix Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 North America 45.4 47.7 48.9 47.8 46.8 49.0 48.3 46.7 45.1 Europe 29.8 29.4 29.3 28.9 28.5 28.3 29.7 29.4 29.6 RoW 24.8 22.9 21.8 23.3 24.7 22.7 22.0 23.9 25.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Exhibit 4: Operating mix (%) Details Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Onsite 61.1 61.0 61.7 62.7 63.2 63.4 63.5 63.9 64.3 Offshore 38.9 39.0 38.3 37.3 36.8 36.6 36.5 36.1 35.7 Utilisation (incl. trainees) 71 74 77 77 77 78 78 77 77
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 103,281 103,673 105,235 107,137 105,432 107,216 112,886 117,095 117,693 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 767 770 788 801 807 818 825 837 843 > $1 million clients 291 296 298 326 319 317 341 356 354 > $5 million clients 96 101 102 105 112 120 120 128 134 > $10 million clients 56 60 62 63 63 64 66 65 71 > $20 million clients 35 36 36 37 40 42 40 38 36 > $50 million clients 13 13 14 14 14 14 14 14 14 Top 5 clients (%) 33 33 32 28 28 29 29 28 27 Top 10 clients (%) 45 44 43 40 39 40 40 38 38 Top 20 clients (%) 57 57 56 52 52 53 52 51 49 Exhibit 7: Vertical-wise breakup Employees Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Telecom 55.3 52.7 52.9 51.3 50.9 49.2 48.4 47.3 46.3 Manufacturing 16.5 17.1 16.7 17.1 17.1 18.1 19.2 18.4 19.2 Technology, Media & Ent. 7.0 7.3 8.2 7.4 7.5 7.5 7.2 6.4 6.2 BFSI 9.1 10.0 9.6 9.8 10.6 11.3 11.5 13.1 14.1 Retail, Transport & Logistics 6.2 6.5 6.0 6.8 6.2 6.5 6.8 7.6 6.5 Others 5.9 6.4 6.6 7.6 7.7 7.4 6.9 7.2 7.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Exhibit 8: DSO days decreased 7 days QoQ (incl. unbilled rev) 115 DSO (Days) 110 105 100 Exhibit 9: Utilization to be used as a margin lever Utilisation - including trainees (%) 82 83 83 Utilisation - excluding trainees (%) 81 81 78 78 79 80 80 80 79 79 76 77 78 78 78 77 77 77 78 78 77 77 77 77 77 76 75 75 75 76 74 74 74 74 75 75 95 90 73 71 69 72 73 74 71, Trust, Trust
Exhibit 10: TECHM lost 2 and gained 6 clients QoQ in the US20mn+ and US$10mn+ bracket 400 350 300 250 200 150 100 50 0 242 245 254, Trust > $1 million clients > $5 million clients > $10 million clients > $20 million clients > $50 million clients 291 296 298 326 319 317 341 356 354 80 86 88 96 101 102 105 112 120 120 128 134 51 50 51 56 60 62 63 63 64 66 65 71 29 30 32 35 36 36 37 40 42 40 38 36 11 12 13 13 13 14 14 14 14 14 14 14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17
Financials Income Statement (` mn) Year End-March FY15 FY16 FY17 FY18E FY19E Revenues 224,779 264,942 291,408 320,612 354,815 Op. Expenses 183,635 222,235 249,565 273,253 299,109 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 297 970 1,286 972 492 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 30.1 35.6 32.4 37.1 44.8 CEPS 37.1 44.3 43.5 50.3 58.5 BVPS 155.9 178.9 198.6 225.4 258.4 DPS 6.0 12.0 9.0 7.5 8.5 Payout (%) 25.9 43.4 36.1 26.2 24.6 Valuation (x) P/E 21.1 13.3 14.1 11.6 9.6 P/BV 2.7 2.3 2.3 1.9 1.7 EV/EBITDA 12.0 8.0 7.7 6.0 4.8 Dividend Yield (%) 1.4 2.9 2.0 1.7 2.0 Return ratio (%) EBIDTA Margin 18.3 16.4 14.4 14.8 15.7 PAT Margin 11.7 11.9 9.9 10.2 11.2 ROAE 21.8 21.4 17.2 17.6 18.6 ROACE 28.1 26.4 22.6 22.6 23.9 Leverage Ratios (x) Long Term D/E 0.0 0.0 0.0 0.0 0.0 Net Debt/Equity (0.3) (0.3) (0.2) (0.3) (0.3) Debt/EBITDA 0.1 0.0 0.1 0.1 0.1 Interest Coverage 121.5 47.1 31.0 45.4 107.4 Current ratio 2.1 2.1 2.6 2.7 2.9 Growth Ratios (%) Income growth 19.4 17.9 10.0 10.0 10.7 EBITDA growth (1.7) 5.3 (2.0) 13.2 17.6 PAT growth (10.6) 20.0 (7.1) 14.1 21.2 Turnover Ratios F.A Turnover x 7.8 8.2 8.2 8.6 9.0 Debtors Days 92 86 75 72 70 Payable days 46 41 37 36 36 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 129,989 153,374 171,806 195,979 225,932 Total Shareholders Fund 134,793 158,213 176,676 200,869 230,842 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 194,580 219,925 257,991 288,493 325,408 Assets Non- current Assets 72,054 70,064 94,726 98,990 103,801 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 306 16,044 19,759 21,960 24,302 Current assets 122,526 149,861 163,265 189,503 221,607 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 245 403 611 703 778 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 194,580 219,925 257,991 288,493 325,408 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 297 970 1,286 972 492 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 30,347 132 8,568 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) 25,105 - - 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 2,174 - - Equity Raised 11,299 6,328 3,047 19 20 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
Institutional Equity Team Names Designation Sectors Email ID's Desk-Number Naren Shah Head Of Equity naren.shah@trustgroup.in +91-22-4084-5074 Sales Trading & Dealing Rajesh Ashar Sales Trader rajesh.ashar@trustgroup.in +91-22-4224-5123 Dealing Desk trustfin@bloomberg.net +91-22-4084-5089 Research Team Binyam Taddese Analyst Rates & Credit Research binyam.taddese@trustgroup.in +91-22-4224-5037 Naushil Shah Analyst Technology, Media & Telecom naushil.shah@trustgroup.in +91-22-4224-5125 Tushar Chaudhari Analyst Commodities, Auto & Mid-caps tushar.chaudhari@trustgroup.in +91-22-4224-5119 Ritu Chaudhary Associate Consumer Durable ritu.chaudhary@trustgroup.in +91-22-4224-5183 6
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