Tech Mahindra Ltd 21 st September, 2013 BUY

Company Report BROKING DEPOSITORY DISTRIBUTION FINANCIAL ADVISORY Tech Mahindra Ltd 21 st September, 2013 BUY CMP Target Price Rs.1298.60 Rs.1650.00 Tech Mahindra is a global systems integrator and business transformation consulting organization focused on the communications industry. The company enjoys strong parentage from the Mahindra Group. BSE Code 532775 NSE Code TECHM Market Cap (Rs Cr.) 30270.76 52 Week High/Low 1434.30/865.25 Industry IT Face Value Rs.10.00 Shares O/S 23.32 Cr. EPS 91.35 Book Value 295.92 P/E 14.22 P/B 4.39 Shareholding Pattern The company has posted strong quarterly performance for the quarter ending June 2013. The merger with Satyam was consummated on 24 th June 2013 with all the statutory & regulatory approvals. The merged revenues from operations on consolidated basis increased by around 22% at Rs.4103.2 crores vs Rs.3767.30 crores y-o-y. Operating profit jumped about 17% at about Rs.864.50 crores as against Rs.739.20 crores in the previous year quarter. The net profit surged by 27% at Rs.686.30 crore for the quarter as compared to Rs.540.40 crore; aided by other income of Rs.207.3 cr. EPS for the quarter stood at Rs.29.63. Operating profit margin stood at 21.07% witnessing an expansion of 60 bps q-o-q whereas declining by 85bps y-o-y due to higher visa costs. Net profit margin at 16.73%; expanding 71 bps y-o-y. The company incurred a capital expenditure of around Rs.235 crores in the quarter. The company has added one client in US$50 mn plus revenue bracket and three clients in USD10 mn to USD20 mn revenue bracket. The total active clients at the quarter end stood at 567 as against 516 from preceding quarter. Top 5 client contribution to revenues stood at 37% and top 10 posted 49%. Total headcount for the quarter ended stood at 83,063; dipped by 46 employees from preceding quarter. The fall was on low margin BPO business. Valuation Research Analyst: Vineeta Mahnot research@hemonline.com With strong deal pipeline, expanding service portfolio via inorganic route; improving discretionary spend and demand pick up in BFSI vertical; Tech Mahindra Ltd. revenue stream looks visible. We believe the company is trading at an attractive valuation at 11.14x and 9.7x of FY14EPS of Rs.116.54 and FY15EPS of Rs.133.92. We initiate a BUY on the stock with a target price of Rs.1650 (appreciation of about 27%) with the medium to long term investment horizon. For Private Circulation Only 1 Hem Research

Business Details Tech Mahindra Limited (Tech Mahindra) is a leading provider of IT Services, Networking Technology Solutions and Business Support Services to the global telecommunications industry. Formed in 1986, in partnership with British Telecommunications plc (BT), it is part of the US $15.9 billion Mahindra Group. In the year 2009 it expanded its IT portfolio by acquiring the leading global business and information technology services company, Satyam Computer Services Ltd. (re-branded as Mahindra Satyam). In the previous year on 21st March 2012, the merger between Tech Mahindra and Mahindra Satyam was announced thus making way for the creation of a leading services organization in the Indian IT offshore landscape. The Company has over 47,500 professionals who provide a unique blend of domain expertise and in-depth technology skill-sets. Mahindra Satyam now merges with Tech Mahindra and will give rise to a technology services powerhouse, with revenues of USD 2.7 Billion and a team of 84,000+ professionals servicing 540 plus customers spread across 46 countries. Tech Mahindra has proven domain expertise in the Telecom domain with differentiated skills, research & development capabilities and innovative delivery models. The Company s solutions enable its clients to maximize returns on their investments, achieve faster time-tomarket, reduce total cost of ownership and provide better customer experience. Its capabilities cover a wide array of services including System Integration (SI), Managed Services (MS), Operations Support Systems (OSS), Business Support Systems (BSS), Infrastructure Management Services (IMS), Network Services, Security Consulting, Product Engineering and Business Support Services (BSG/BPO). The Company has been focusing on delivering comprehensive services to Telecom Service Providers (TSPs), Telecom Equipment Manufacturers (TEMs) and Independent Software Vendors (ISVs) and is best positioned to leverage telecom IT outsourcing opportunities through its service offerings across the Telecom value chain. It has more than 150 active client engagements, predominantly in the Telecom Sector. Tech Mahindra s achievements have been recognized by various industry analysts, forums and clients. The organization has also won several prestigious awards and accolades. Tech Mahindra has principal offices in the UK, United States, Germany, UAE, Egypt, Singapore, India, Thailand, Taiwan, Malaysia, Philippines, Canada and Australia. The Company has an extensive global foot print with 17 sales offices and 15 delivery centres in more than 31 countries around the world. For Private Circulation Only 2 Hem Research

$5 billion revenue target by FY15 The Company s management targeted to achieve $5 billion of revenues by fiscal '15. The company has current run rate of 2.9 billion and expects to maintain the current trajectory. The company plans to follow four planks to achieve such growth focusing on increasing the share of its business through mergers and acquisitions, through joint ventures, through products, innovation and through process as a service. The company has declared a policy of growing organically and non-organically. The management has indicated firm growth of non-bt business going ahead on account of strong deal pipeline across geographies and with expanded services portfolio. BT revenues (which dipped recently) are expected to remain flattish going ahead. Its telecom revenues other then BT would continue to grow ahead of the industry average. The company is seeing discretionary spending improving too. The company planned to give hike in the fourth quarter of the current year in place of second quarter on account of realignment of salary structure of Satyam and Tech Mahindra; impacting margins. The company plans to maintain current margin levels in the coming years. Capex for the coming year for the merged entity is estimated around 600 crores. Tech Mahindra is planning to invest around Rs 1,000 crore over the next 3 years to expand its infrastructure capacity and increase its delivery capabilities. This expansion plan is not only for big cities like Mumbai and Chennai but also for tier 2 and tier 3 cities. Big ticket deals Tech Mahindra has witnessed that its deal pipeline is improving and there is positive momentum from customers especially post merger and there is increased interest around mobility and network services. The company has won three deals on the enterprise side totaling between 50 and 75 million TCV large deals. Management has reiterated that four deals are in pipeline; implying its strong competence to win big ticket deals. Further, overall the sentiment particularly in United States and even in parts of Europe are too witnessing signs of improvement and the confidence among large global corporations is also improving. The merger with Satyam has also enabled it to win deals in expanded services portfolio. For Private Circulation Only 3 Hem Research

Synergies arising out of merger Tech Mahindra has proven track record of growth through inorganic route. It has proved its creditability with successful acquisitions of Satyam, Comviva and Huticson etc. Merger of Satyam would create lot of synergies for the company. The merged entity would enjoy the dominant position in the telecom vertical and also will witness jump in revenues on account of cross-selling services among both companies. The company s service portfolio is expanded with the acquisitions leading to large deal wins and increasing market share. Post merger the company has accretion of treasure stock of 24 million shares which can be used for any acquisition even though EPS would be diluted but would be helpful in driving growth. The management has indicated that with sufficient cash and this treasury stock; it can look for acquisitions. The targets would be the one s that will expand company s geographical reach along with strengthening its offering and firming its verticals. Acquisitions would be based on not for bulking purposes but for strategic reasons. Broad based growth In the first quarter ended the merged entity has witnessed growth in all industry verticals except banking, financial services and insurance (BFSI). The main stream telecom vertical revenues grew by 13.65% q-o-q. Revenues from manufacturing, technology, media and entertainment and retail vertical revenues grew about 9% q-o-q. On a yearly basis, every vertical except BFSI has grown decently. Further, on geographical front merged revenues from America grew smartly by about 17% q-o-q; revenues from Europe jumped slightly by ~6% q-o-q and ROW revenues were little bit soft. For Private Circulation Only 4 Hem Research

Consolidated Profit & Loss Account (Merged) Rs. Crore Particulars FY12 FY13 FY14E FY15E Net sales 11702.40 14332.00 17685.69 20161.68 Growth 22.47% 23.40% 14.00% Expenditure 9750.60 11268.80 13777.15 15746.28 EBITDA 1951.80 3063.20 3908.54 4415.41 Growth 56.94% 27.60% 12.97% EBITDA margin 16.68% 21.37% 22.10% 21.90% Other income 501.30 212.20 371.40 504.04 Depreciation & Amortisation 319.00 389.60 509.59 575.08 EBIT 2134.10 2885.80 3770.35 4344.37 EBIT margin 18.24% 20.14% 21.32% 21.55% Interest 107.30 92.10 88.43 87.24 PBT 2026.80 2793.70 3681.92 4257.13 Tax 228.90 647.90 920.48 1064.28 PAT 1797.90 2145.80 2761.44 3192.85 Minority interest (8.40) 30.10 43.65 69.83 Adjusted PAT 1806.30 2115.70 2717.79 3123.02 Growth 17.13 28.46 14.91 Net Profit margins 15.44 14.76 15.37 15.49 Exceptional item (36.90) 160.10 0.00 0.00 Reported PAT 1843.20 1955.60 2717.79 3123.02 Equity Capital 230.90 231.60 232.32 232.32 Equity Shares 23.09 23.16 23.32 23.32 Adjusted EPS 78.23 91.35 116.54 133.92 Ratios Particulars FY12 FY13 FY14E FY15E Return on Equity 37.51 30.87 28.96 25.53 Return on Capital employed 33.36 36.39 36.37 32.91 Debt/Equity 0.33 0.16 0.10 0.08 Asset turnover 1.01 1.04 1.03 0.93 Current Ratio 2.04 2.12 2.19 2.26 Book value per share 208.57 295.92 402.46 524.52 For Private Circulation Only 5 Hem Research

Balance Sheet (Merged) Rs. Crore Particulars FY12 FY13 FY14E FY15E Share Capital 230.90 231.60 232.32 232.32 Reserves & Surplus 4584.90 6621.90 9153.13 11,999.51 Shareholders funds 4815.80 6853.50 9385.45 12231.83 Pref. Sh. Issues by subsidiaries 0.00 0.00 0.00 0.00 Borrowings 1581.50 1076.80 982.54 969.31 Amount pending investigation 1,230.40 1230.40 1230.40 1230.40 Minority Interest 15.00 134.40 134.40 134.40 Sources of funds 7642.70 9295.10 11732.79 14565.94 Gross block 1,488.20 2,231.80 2,816.36 3,011.80 Accumulated Depreciation 0.00 0.00 0.00 0.00 Net block 1488.20 2231.80 2816.36 3011.80 Capital work in progress 367.70 259.50 509.45 661.53 Investments 257.90 210.30 359.71 473.60 Deffered tax assets 267.80 347.70 347.70 347.70 Interest in TML Benefit Trust 1,207.10 1,207.10 1,207.10 1,207.10 Inventories 14.80 11.00 23.90 31.80 Sundry debtors 3,277.40 4,022.50 5,376.75 7,313.68 Cash and bank balance 3,096.00 3,462.90 4,062.43 5,087.78 Other current assets 3.60 21.90 35.84 47.70 Loans and advances 1,572.20 2,035.80 2,449.41 3,418.35 Total current assets 7,964.00 9,554.10 11,948.33 15,899.31 Current liabilities and provisions 3,910.00 4,515.40 5,455.86 7,035.10 Net current assets 4,054.00 5,038.70 6,492.47 8,864.22 Misc exp 0.00 0.00 0.00 0.00 Uses of funds 7,642.70 9,295.10 11,732.79 14,565.94 For Private Circulation Only 6 Hem Research

Quarterly Financial Highlights Rs. Crore Particulars Q1FY14 Q1FY13 Q4FY13 YoY% QoQ% Revenues 4103.20 3372.70 3767.30 21.66 8.92 Expenditures 3238.70 2633.50 2996.00 22.98 8.10 Operating Profit 864.50 739.20 771.30 16.95 12.08 Adjusted Net Profit 686.30 540.40 503.60 27.00 36.28 OPM% 21.07 21.92 20.47 (85bps) 60bps NPM % 16.73 16.02 13.37 71bps 336bps Adjusted EPS 29.63 23.33 21.74 27.00 36.29 *Adjusted for post merger (Satyam) equity shares Past Price movement of the stock For Private Circulation Only 7 Hem Research

www.hemonline.com research@hemonline.com HEM SECURITIES LIMITED MEMBER-BSE,CDSL, SEBI REGISTERED CATEGORY I MERCHANT BANKER MUMBAI OFFICE: 14/15, KHATAU BLDG., IST FLOOR, 40, BANK STREET, FORT, MUMBAI-400001 PHONE- 0091 22 2267 1000 FAX- 0091 22 2262 5991 JAIPUR OFFICE: 203-204, JAIPUR TOWERS, M I ROAD, JAIPUR-302001 PHONE- 0091 141 405 1000 FAX- 0091 141 510 1757 GROUP COMPANIES HEM FINLEASE PRIVATE LIMITED MEMBER-NSE HEM MULTI COMMODITIES PRIVATE LIMITED MEMBER-NCDEX, MCX HEM FINANCIAL SERVICES LIMITED NBFC REGISTERED WITH RBI For Private Circulation Only 8 Hem Research

Disclaimer & Disclosure: This document is prepared for our clients only, on the basis of publicly available information and other sources believed to be reliable. Whilst we are not soliciting any action based on this information, all care has been taken to ensure that the facts are accurate, fair and reasonable. This information is not intended as an offer or solicitation for the purchase or sell of any financial instrument and at any point should not be considered as an investment advise. Reader is requested to rely on his own decision and may take independent professional advise before investing. Hem Securities Limited, Hem Finlease Private Limited, Hem Multi Commodities Pvt. Limited, Directors and any of its employees shall not be responsible for the content. The person accessing this information specifically agrees to exempt Hem Securities Limited, Hem Finlease Private Limited, Hem Multi Commodities Pvt. Limited or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and further agrees to hold Hem Securities Limited, Hem Finlease Private Limited, Hem Multi Commodities Pvt. Limited or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The companies and its affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material may from time to time, have long or short positions in, and buy or sell the securities there of, company (ies) mentioned here in and the same have acted upon or used the information prior to, or immediately following the publication. Disclosure of Interest Statement Company Name 1. Analyst Ownership of the Stock No 2. Hem & its Group Company Ownership of the Stock Yes 3. Hem & its Group Companies Director Ownership of the Stock Yes 4. Broking relationship with company covered No Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. For Private Circulation Only 9 Hem Research