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Stock Data
Sector IT
Face Value (Rs) Rs.10.00
52 wk. High/Low (Rs.) Rs.1158.00/600.00
Volume (2 wk. Avg.) 34000
BSE Code 532755
Market Cap (Rs.mn.) 79844.90
Financials (Rs.mn.) FY10A FY11E FY12E
Net Sales 46254.00 54579.72 61129.29
EBIDTA 12079.10 11711.22 13037.35
PAT 7031.70 7490.34 8376.22
EPS (Rs) 57.49 59.57 66.62
P/E (x) 11.05 10.66 9.53
TECH MAHINDRA LTD BUY F
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SYNOPSIS
• Tech Mahindra limited is a leading provider of IT Solutions to Telecom Industry. It happens to be the Sixth largest IT services Player in India with a core focus on Telecom.
• Added 7 new clients in the second quarter of the current fiscal.
• During the quarter Tech Mahindra entered into a strategic partnership with Bharti Airtel to offer world class customer services across Africa.
• Tech Mahindra has been selected by a leading Telecom Equipment Manufacturer (TEM) in India for Managed Services.
• During the quarter Tech Mahindra has engaged by a large African operator for implementation of a Business Intelligence solution.
• During the quarter Tech Mahindra has been selected by a leading North American Independent Software Vendor (ISV) for managing their Network Management Product line.
• Revenue from the top 10 clients contributed 84% in Q2FY11.
• Total head count of the company as on Sep. 30, 2010 stood at 34,007 with utilization rate at 75%.
• Tech Mahindra has been selected by an Indian digital satellite services provider to assist in transformation of its Billing architecture.
• Net sales of the company are expected to grow at a CAGR of 11% over 2009 to 2012E respectively.
1 Year Comparative Graph
TECH MAHINDRA LTD BSE SENSEX
V.S.R. Sastry
Equity Research Desk
Dr. V.V.L.N. Sastry Ph.D.
Chief Research Officer
C.M.P: Target Price: Rs.635.00 Rs.730.00
Share Holding Pattern
December 09, 2010
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Peer Group Comparison
Name of the company CMP(Rs.)
Market Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/BV(x) Dividend (%)
Tech Mahindra Ltd 635.00 79844.90 56.47 11.42 2.83 35
TCS 1072.60 209931.52 32.51 32.99 13.98 200
Wipro Technologies 436.90 107127.88 19.37 22.56 6.15 300
HCL Technologies 425.65 29074.88 13.92 30.58 5.89 200
Investment Highlights
• Result Update (Q2 FY11) Tech Mahindra Ltd reported a rise in consolidated profit after tax for the quarter ended September 2010. During the quarter, the profit after tax of the company increased 10.14% to Rs 1866.50 million from Rs 1694.70 million in the same quarter previous year. Net sales for the quarter increased 34.34% to Rs 15339.00 million, while total income for the quarter rose 31.95% to Rs 15422.40 million, when compared with the prior year period. Company posted earnings of Rs 14.84 a share during the quarter, registering 7.18% growth over prior year period.
Quarterly Results - Consolidated (Rs in mn)
As at Sep - 10 Sep - 09 %Change
Net Sales 15339.00 11418.00 34.34
PAT 1866.50 1694.70 10.14
Basic EPS 14.84 13.85 7.18
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Net Sales & PAT Growth
During the quarter, Net sales rose by 34.34% to Rs.15339.00 million from Rs.11418.00 million in the same quarter last year and the Profit after tax for the quarter ended September 2010 was Rs.1866.50 million increased by 10.14% from Rs.1694.70 million compared to same quarter last year.
• Entered into a strategic alliance with Bharti Airtel
The nascent African Business Process Outsourcing sector which promises to deliver economic growth to many countries across the continent is all set for rapid growth following Bharti Airtel’s selection of Tech Mahindra as partner to drive world class customer service across 16 countries. Under this agreement Bharti Airtel, which owns and currently operates the Zain brand in 16 countries across Africa, will outsource core customer service functions like call centers and back office as it prepares for significant growth in the region.
• Signs agreement
Etisalat DB Telecom has signed over Rs 7.5 billion worth outsourcing agreements with BPO providers, Tech Mahindra, Aegis and Conflux. The move is to accelerate Etisalat DB Telecom`s forthcoming roll-out of telecom services in the country. Under the agreement, Tech Mahindra, Aegis and Conflux would set up state-of-the-art contact centres to provide a host of customer management services including billing, collections, customer service and retention amongst others.
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• Wins USD 50 mn order
Tech Mahindra has inked a deal with Middle East telecom major for a green field IT implementation. Sources added that the deal size could be between USD 40 million and USD 50 million. Multinational firms Hewlett Packard and Cisco, which provide server and networking hardware, have also won different parts of the deal.
• Starts BPO operations
Tech Mahindra has gone live with its business process outsourcing (BPO) operations from the new campus in Chandigarh.
• Selected by a leading North American ISV
Tech Mahindra has been selected by a leading North American Independent Software Vendor (ISV) for managing their Network Management Product line. For the next three years, Tech Mahindra's services will equip the ISV with enhanced product features and enable them to achieve operational efficiency and scalability.
• Onsite-Offshore Break-Up
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• Revenue by Geography
• Headcount Graph
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• Client Contribution to revenue
• Utilization
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Company Profile Tech Mahindra Ltd (TML) is a leading provider of solutions and services to the telecommunications industry, majority stake owned by Mahindra & Mahindra Limited, in partnership with British Telecommunications plc. With total revenues of Rs 4,464.7 crores in the year ended March 31, 2009, Tech Mahindra is India’s 5th largest software, and serves telecom service providers, equipment manufacturers, software vendors and systems integrators. Tech Mahindra solutions enable clients to maximize returns on IT investment by achieving fast time to market reduced total cost of ownership and high customer satisfaction. Tech Mahindra achieves this through its domain and process expertise, distinctive IT skills, research and development, proven innovative delivery models and approach to off shoring. Company Services The company Services is divided into three. They are:
1. IT services
2. BPO Services
3. R & D Services
Tech Mahindra
• IT Services Solution Integration Application Development & Management Consulting Managed Services Infrastructure Management Services
• BPO Services
Finance &
Accounting
Human Resources
Enterprise support
& Market Research
Data Analytics
• R& D Services
NMS/EMS
Testing
Embedded
Testing
Hardware
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Financial Results
12 Months Ended Profit & Loss Account (Consolidated)
Value(Rs. in million) FY09A FY10A FY11E FY12E
Description 12m 12m 12m 12m
Net Sales 44647.00 46254.00 54579.72 61129.29
Other Income -378.00 753.70 904.44 994.88
Total Income 44269.00 47007.70 55484.16 62124.17
Expenditure -31822.00 -34928.60 -43772.94 -49086.82
Operating Profit 12447.00 12079.10 11711.22 13037.35
Interest -25.00 -2184.10 -1159.57 -1252.34
Gross Profit 12422.00 9895.00 10551.65 11785.02
Exceptional Items -84.90 0.00 0.00
Depreciation -1097.40 -1338.60 -1472.46 -1619.71
Profit before Tax 11324.60 8471.50 9079.19 10165.31
Tax -1179.00 -1439.80 -1588.86 -1789.09
Profit after Tax 10145.60 7031.70 7490.34 8376.22
Extraordinary Items 0.00 0.00 -367.00 0.00
Minority Interest -1.00 -27.50 1.01 0.00
Net Profit 10144.60 7004.20 7124.35 8376.22
Equity Capital 1217.30 1223.20 1,257.40 1,257.40
Reserves 19151.10 25697.70 32,822.05 41,198.26
Face Value 10.00 10.00 10.00 10.00
Total No. of Shares 121.73 122.32 125.74 125.74
EPS 83.35 57.49 59.57 66.62
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Quarterly Ended Profit & Loss Account (Consolidated)
Value(Rs. in million) 31-Mar-10 30-Jun-10 30-Sep-10 31-Dec-10E
Description 3m 3m 3m 3m
Net Sales 11832.90 11336.80 15339.00 15645.78
Other Income 739.60 252.80 83.40 88.40
Total Income 12572.50 11589.60 15422.40 15734.18
Expenditure -9044.90 -9210.30 -12520.60 -12751.31
Operating Profit 3527.60 2379.30 2901.80 2982.87
Interest -310.80 -263.70 -269.90 -278.00
Gross Profit 3216.80 2115.60 2631.90 2704.88
Depreciation -399.50 -354.10 -346.90 -364.25
Profit before Tax 2817.30 1761.50 2285.00 2340.63
Tax -541.70 -312.30 -418.50 -397.91
Profit after Tax 2275.60 1449.20 1866.50 1942.72
Extraordinary Items 0.00 0.00 -367.00 0.00
Minority Interest -5.70 -6.10 7.20 0.00
Net Profit 2269.90 1443.10 1506.70 1942.72
Equity Capital 1223.20 1240.70 1257.40 1257.40
Face Value 10.00 10.00 10.00 10.00
Total No. of Shares 122.32 124.07 125.74 125.74
EPS 18.60 11.68 14.84 15.45
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Key Ratios Particulars FY09 FY10 FY11E FY12E
EPS (Rs.) 83.35 57.49 59.57 66.62
EBITDA Margin (%) 28% 26% 21% 21%
PAT Margin (%) 23% 15% 14% 14%
P/E Ratio (x) 7.62 11.05 10.66 9.53
ROE (%) 50% 26% 21% 20%
ROCE (%) 56% 40% 18% 17%
EV/EBITDA (x) 6.21 6.43 6.82 6.12
Debt-Equity Ratio 0.00 0.00 0.69 0.61
Book Value (Rs.) 167.32 220.09 271.03 337.65
P/BV 3.80 2.89 2.34 1.88
Charts
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Outlook and Conclusion
• At the current market price of Rs.635.00 the stock is trading at a P/Ex of 10.66x for FY11E and 9.53x for FY12E.
• The EPS of the stock is expected to be at Rs.59.57 and Rs.66.62 for FY11E and
FY12E respectively. • On the basis of price to book value, the stock trades at 2.34x and 1.88x for
FY11E and FY12E respectively.
• The Net sales of the company are expected to grow at a CAGR of 11% respectively over FY09 to FY12E.
• Tech Mahindra restructured its organization to improve customer centricity and
to address the changing needs of the marketplace.
• During the quarter the company received Rs 9682 million as contract restructuring fees on certain long term contracts. The company repaid Rs 4500 million of debt using part of these funds.
• Tech Mahindra has been engaged by a large African operator for
implementation of a Business Intelligence solution.
• Tech Mahindra has been selected by a leading North American Independent Software Vendor (ISV) for managing their Network Management Product line.
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• Tech Mahindra has been selected by a leading Telecom Equipment
Manufacturer (TEM) in India for Managed Services.
• Tech Mahindra has been consistently winning big deals in the telecom space and has emerged as a preferred vendor of choice in the telecom vertical. The company has been constantly expanding its focus into North America and Asia to cover up for its stagnant revenue stream from the European market.
• We recommend a “BUY” on the stock with a target price of Rs.730.00 for
medium to long term. Industry Overview Sector structure/Market size The Indian information technology industry has played a key role in putting India on the global map. Thanks to the success of the IT industry, India is now a power to reckon with. According to the National Association of Software and Service Companies (NASSCOM), the apex body for software services in India, the revenue of the information technology sector has risen from 1.2 per cent of the gross domestic product (GDP) in FY 1997-98 to an estimated 5.8 per cent in FY 2008-09.
India's IT growth in the world is primarily dominated by IT software and services such as Custom Application Development and Maintenance (CADM), System Integration, IT Consulting, Application Management, Infrastructure Management Services, Software testing, Service-oriented architecture and Web services. As per NASSCOM's latest findings:
• Indian IT-BPO sector grew by 12 per cent in FY 2009 to reach US$ 71.7 billion in aggregate revenue (including hardware). Of this, the software and services segment accounted for US$ 59.6 billion.
• IT-BPO exports (including hardware exports) grew by 16 per cent from US$ 40.9
billion in FY 2007-08 to US$ 47.3 billion in FY 2008-09. Moreover, according to a study by Springboard Research, the Indian IT services market is estimated to remain the fastest growing in the Asia-Pacific region with a CAGR of 18.6 per cent.
Despite the uncertainty in the global economy, the top three IT majors— Infosys, TCS and Wipro—have seen revenue growth from all important sources of income: from the North American and European regions, in the financial services vertical and from application maintenance and development (ADM) offerings between fiscal years 2008 and 2009.
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At present, there are 60 million Internet users in the country. According to Manufacturer’s Association of IT (MAIT), the number of active Internet entities rose to 8.6 million by March 2009 from 7.2 million units in March 2008. MAIT has outlined 'Goal 511', an ambitious target that talks about 500 million Internet users, 100 million broadband connections, and 100 million connected devices by 2012. A latest study by MAIT estimated that the total PC sale in India is likely to grow by 7 per cent in 2009-10, with total sales expected to cross 7.3 million units.
Outsourcing A research by Gartner forecasts India as the undisputed leader in the outsourcing space in the year 2008. India's most prized resource is its readily available technical work force. India has the second largest English-speaking scientific professionals in the world, second only to the US. It is estimated that India has over 4 million technical workers, over 1,832 educational institutions and polytechnics, which train more than 67,785 computer software professionals every year. The enormous base of skilled manpower is a major draw for global customers. According to NASSCOM, software and services exports (including exports of IT services, BPO, engineering services and R&D and software products) reached US$ 47 billion in FY 2008-09, contributing nearly 78 per cent to the total software and services revenue of US$ 59.6 billion. India continues to be the most preferred destination for companies looking to offshore their IT and back-office functions. It also retains its low-cost advantage and is among the most financially attractive locations when viewed in combination with the business environment it offers and the availability of skilled people, according to global management consultancy AT Kearney. India has retained its numerous Uno position even as some other well-established outsourcing hubs dropped in their attractiveness to be replaced by new emerging destinations in AT Kearney’s latest ranking of the top outsourcing destinations across the globe. The top three countries in the 2009 Global Services Location Index (GSLI) remain the same — India, China and Malaysia.
Domestic Markets India's domestic market has also become a force to reckon with, as the existing IT infrastructure evolves both in terms of technology and depth of penetration. According to NASSCOM, domestic IT market (including hardware) reached US$ 24.3 billion in FY 2008-09 as against US$ 23.1 billion in FY 2007-08, a growth of 5.3 per cent.
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India Inc's demand for IT services and products has bolstered growth in the domestic sector with deal sizes going up remarkably and contracts worth US$ 50 million-US$ 100 million up for grabs. The market for enterprise networking equipment in India is estimated to grow from US$ 1 billion in 2008 to US$ 1.7 billion by 2012, recording a compounded annual growth rate (CAGR) of 15 per cent during this period, according to a study by Springboard Research. Investments
• Infosys Technologies Ltd will invest US$ 70 million over the next three quarters of the current financial year towards increasing its sales and marketing staff overseas, building new capabilities and hiring local resources for its international centres.
• The Andhra Pradesh Government expects the IT-related SEZs and Software
Technology Parks of India (STPI) in the State to receive about US$ 3.27 billion investments in the next five years.
• HCL Technologies has entered into a strategic partnership with South Africa’s
UCS Group. As part of the all-cash deal, HCL will acquire UCS’s enterprise solutions SAP practice focused on the retail sector for US$ 7.7 million.
Rural Penetration According to a report of the Internet and Mobile Association of India (IAMAI), rural India has 3.3 million active internet users. Since rural India was mapped for the first time, the year-on-year growth of internet users in rural India could not be estimated. The research also notes there are 5.5 million people who claim to have used Internet at some point in time.
Government Initiatives
• The government set up the National Taskforce on Information Technology and Software Development with the objective of framing a long term National IT Policy for the country.
• Enactment of the Information Technology Act, which provides a legal framework
to facilitate electronic commerce and electronic transactions. • The government-led National e-Governance Programme, has played an important
role in increasing internet penetration in rural India.
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Road Ahead The Indian information technology sector continues to be one of the sunshine sectors of the Indian economy showing rapid growth and promise. According to a report prepared by McKinsey for NASSCOM, the exports component of the Indian industry is expected to reach US$ 175 billion in revenue by 2020. The domestic component will contribute US$ 50 billion in revenue by 2020. Together, the export and domestic markets are likely to bring in US$ 225 billion in revenue, as new opportunities emerge in areas such as public sector and healthcare, and as geographies including BRIC and Japan opt for greater outsourcing.
_____________ ____ ____________________________ Disclaimer:
This document prepared by our research analysts does not constitute an offer or solicitation
for the purchase or sale of any financial instrument or as an official confirmation of any
transaction. The information contained herein is from publicly available data or other
sources believed to be reliable but do not represent that it is accurate or complete and it
should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of its
affiliates 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. This document
is provide for assistance only and is not intended to be and must not alone be taken as the
basis for an investment decision.
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