Tech Mahindra Result Update 4qfy2010-040510

4QFY2010 Result Update I IT
May 04, 2010

Tech Mahindra BUY
CMP Rs 744
Performance Highlights Target Price Rs1,168
Tech Mahindra reported better-than-expected 4QFY2010 results, with revenue Investment Period 12 months
de-growth of 0.3% qoq at Rs1,183cr, as against our estimate of Rs1,164cr.
Revenue growth in constant currency was 4% at US $ 264mn; however, the Stock Info
sharp fall in the GBP (6%) resulted in revenue underperformance in the
Sector IT
reported currency. EBIDTA margins remained flat on a qoq basis at 23.6%,
despite rupee appreciation and strong net manpower addition of 3,120 Market Cap (Rs cr) 9,064
employees. Profit after tax was up 31.3% qoq, on account of lower interest
Beta 0.8
costs (down 32.3% qoq) and high other income of Rs74cr (including US
$13.5mn on account of Fx gains). We maintain our Buy recommendation on 52 WK High / Low
the stock. 1158/326
Avg. Daily Volume 2,61,167
Growth-backed by strong volumes from BT: The Revenue growth was largely Face Value (Rs) 10
driven by strong volume growth of about ~6.5% qoq in the Top account (BT),
whereas the rest of the clients recorded a cumulative volume growth of 1.8% BSE Sensex 17,929
qoq. The growth in BT was supported by a short-term (non-recurring) project in
Nifty 5,148
4QFY2010, and would continue its GBP 70-72mn run-rate in the coming
quarters. The operating profit remained flat at Rs279cr (as against Rs281cr in Reuters Code TEML.BO
3QFY2010), despite a negative Fx impact of ~4.5%. The lower realisations on
Bloomberg Code TECHM.IN
revenues were compensated to a certain extent, as the company managed a
US $13.5mn profit on account of exchange gains. The interest cost was down Shareholding Pattern (%)
by 32% qoq, as it paid another Rs350cr of loans from the restructuring fee
received in 3QFY2010. Thus, the bottom-line grew by 31.3% qoq to Rs227cr. Promoters 74.85

MF/Banks/Indian FLs 8.68
Outlook and Valuation: We expect Tech Mahindra to record an 11% CAGR in
its Top-line over FY2010-12E (excluding Mahindra Satyam), while the Bottom- FII/NRIs/OCBs 0.61
line is expected to grow at a compounded rate of 11.6% over FY2010-12E. We
Indian Public 15.86
have valued TechM on an SOTP basis, valuing Tech Mahindra (excluding
Satyam) at 13x of its expected FY2012E EPS of Rs67.8, at a 40% discount to Abs. (%) 3m 1yr 3yr
our Infosys target multiple of 22x (Historical discount of 22%), and valuing
Satyam’s stake at Rs274 per share, based on a Market cap basis, applying a Sensex 5.6 41.2 23.0
25% holding company discount, to arrive at a target price of Rs1,155. Hence,
TechM (21.4) 121.8 (54.9)
we maintain our Buy recommendation.

Key Financials (Consolidated excl. Mahindra Satyam)
Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Net Sales 4,465 4,625 4,989 5,704
% chg 3.6 7.9 14.3 15.0
Net Profit 1,089 709 763 876
% chg 207.5 (31.0) 8.9 14.8
EBITDA Margin (%) 29.0 24.5 24.0 23.0
FDEPS (Rs) 77.6 53.6 58.3 67.0
P/E (x) 8.9 13.0 12.2 11.0 Rahul Jain
P/BV (x) 4.6 3.5 2.7 2.1 Tel: 022 – 4040 3800 Ext: 345
E-mail: Rahul.j@angeltrade.com
RoE (%) 63.0 30.6 24.9 22.0
RoACE (%) 85.9 76.7 82.7 73.4
Vibha Salvi
EV/Sales (x) 1.8 1.5 1.3 1.0
Tel: 022 – 4040 3800 Ext: 329
EV/EBITDA (x) 6.2 5.9 5.3 4.3
E-mail: vibhas.salvi@angeltrade.com
Source: Company, Angel Research

1
Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539

Tech Mahindra I 4QFY2010 Result Update

Exhibit 1: 4QFY2010 Performance (Consolidated)
Y/E March (Rs cr) 4Q FY10 3Q FY10 % chg (qoq) 4Q FY09 % chg (yoy) FY2010 FY2009 % chg
Net Revenues 1,183 1,187 (0.3) 1,051 12.6 4,625 4,465 3.6
Cost of Revenues 737 751 (1.9) 611 20.6 2,871 2,571 11.7
Gross Profit 446 436 2.3 440 1.4 1,754 1,894 (7.4)
SG&A Expenses 167 155 7.7 156 7.4 622 612 1.7
Operating Profit (EBITDA) 279 281 (0.7) 284 (1.9) 1,133 1,283 (11.7)
Other Income 74 1 8 75 (38)
Interest 31 46 (32.3) 2 218 3
Depreciation 40 33 20.7 29 39.7 134 110 22.1
Income before Income Taxes 282 202 39.3 261 7.9 856 1,133 (24.5)
Tax 54 29 89.8 31 77.0 144 118 22.1
Minority Interest (1) (1) (35.2) (0) (3) (0)
Extraordinary Items - - (9) -
Net Income 227 173 31.3 230 (1.5) 700 1,015 (31.0)
Diluted EPS (Rs) 17.4 13.0 34.0 17.9 (2.7) 54.4 78.8 (31.0)
Gross Profit Margin (%) 37.7 36.7 41.8 37.9 42.4
EBITDA Margin (%) 23.6 23.6 27.0 24.5 28.7
Net Profit Margin (%) 19.2 14.6 21.9 15.1 22.7
Source :Company Data, Angel research

Top-line supported by Strong Volume growth in BT

Tech Mahindra’s revenues de-grew by 0.3% qoq (up 12.6% yoy), led by a strong
volume growth of 4.1% qoq. The volume growth in the Top account was up by
~6.5% supported by a short-term (non-recurring) project concluding in 4QFY2010.
However, the management has guided towards a sustained revenue run-rate of GBP
70-72mn from BT for the foreseeable future. The company is still negotiating for the
Andes deal, but is confident of maintaining its business flow from BT. The volume
for the non-BT business grew by ~1.8%. The contribution from the Top 2-5 clients
fell by 9% qoq to US $67mn (from US $74mn). Volumes for the BPO segment grew
by 8.2% qoq; thus, the company continued its hiring in the segment. The BPO
headcount has gone up to 8,087 in 4QFY2010 from 3,769 in 4QFY2009. The total
employee count touched 33,524 at the end of the quarter, with a net addition of
3,120. The company marked a net client addition of 3 clients to 113, largely in the
RoW (Rest of the World) market. Geography-wise, the growth momentum came
from Europe, where the total contribution grew by 1%, from 56% in 3QFY2010 to
57% in 4QFY2010, despite a severe Fx headwind (in terms of GBP depreciation
against the USD).

Exhibit 2: Revenue Mix Trend
750
700
650
600
550
500
(Rs cr)

450
400
350
300
1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

BT Revenue Non BT Revenue

Source: Company Data, Angel research
May 4, 2010 2


EBITDA margins remain flat

The company witnessed a 98bp qoq reduction in the cost of revenues; however, the
SG&A spends moved up by 106bp qoq, resulting in a flattish EBIDTA margin for the
quarter.

Exhibit 3: EBITDA Margin Trend

34
32
30
28
(%)

26
24
22
20
1QFY08

2QFY08

3QFY08

4QFY08

1QFY09

2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10
Source: Company Data, Angel research

Interest costs went down by 32% qoq, as the company paid debt worth Rs350cr from
the restructuring fee received in 3QFY2010. The total debt as on FY2010E is
~1,370cr, at a cost of 7%. Other income of Rs74cr during the quarter lifted the
bottom-line by 31% qoq to Rs227cr. The other Income largely includes exchange
gains of about Rs60cr on the hedging portfolio. The effective Tax rate for the quarter
was 19.2%, as against 14.1% in 3QFY2010, on account of the higher other income
component. The profit margin, after adjusting for other income, showed an
improvement of 80bp, on a sequential basis, to 15.4%.

Profitability buoyed by lower interest costs and high Other Income

The operating margin for the quarter was maintained at 23.6% in 4QFY2010, as
the company saved on salary costs through higher efficiency, covering up for the
weaker realisations (due to the INR appreciation). The utilisation remained flat at
73%, absorbing the increase in employee additions. Going forward, margins may
come under pressure as the company may announce wage hikes in 1QFY2010, in
line with its competitors.

Mahindra Satyam Financial Performance likely to be announced by June 30, 2010

The Financials of Mahindra Satyam are likely to be declared by June 30, 2010,
which may add a profit contribution from the associate from 2QFY2011E. We have
valued Satyam on a market cap basis, providing for a 25% holding company
discount. The per share value of Satyam for TechM shareholders stood at Rs274.

May 4, 2010 3


Outlook and Valuation

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 believe that the
uncertainty on restructuring with BT (46% of total revenues) has posed a severe
overhang on the future revenue growth of the company. However, the company has
been clocking strong revenue traction in the Non-BT business, registering a CQGR
of 7% over 1QFY2008-4QFY2010. The management is confident of maintaining
the business momentum with BT, with an expected annual run-rate of GBP
~285mn; thus, the revenue growth would largely remain a function of non-BT
business in FY2011E. The Net Profitability has dropped by 760bp in FY2010 over
FY2009 to 15.1%. We expect the company to maintain its profitability, as it has
headroom for efficiency in utilisation (73%) and S&M expenses, in view of its higher
business visibility (assured volume on the BT Strada project), which would cushion
margin pressures.

Exhibit 4: Key Financial Assumptions
FY2009 FY2010E FY2011E FY2012E
Revenue Mix (%)
BT 58 47 41 40
Non-BT 42 53 59 60
EBIT Margin (%)
BT 24.8 18.5 16.5 16.0
Non-BT 29.0 24.5 24.0 22.5

We expect Tech Mahindra to record an 11% CAGR in its Top-line over FY2010-12E
(excluding Mahindra Satyam), while the Bottom-line is expected to grow at a
compounded rate of 11.6% over FY2010-12E. We have valued TechM on an SOTP
basis, valuing Tech Mahindra (excluding Satyam) at 13x of its expected FY2012E
EPS of Rs67.8, at a 40% discount to our Infosys target multiple of 22x (Historical
discount of 22%), and valuing Satyam’s stake at Rs274 per share, based on a
Market cap basis, applying a 25% holding company discount, to arrive at a target
price of Rs1,155. Hence, we maintain our Buy recommendation.

Exhibit 5: One year forward P/E Band

2400
2200
2000
34x
1800
Share Price (Rs)

1600
1400 26x
1200
1000 18x
800
600 10x
400
200
0
Apr-07

Apr-08

Apr-09

Apr-10
Aug-06

Aug-07

Aug-08

Aug-09
Dec-06

Dec-07

Dec-08

Dec-09


May 4, 2010 4


Exhibit 6: Premium/Discount in Tech Mahindra P/E v/s Infosys P/E
25
15
5
(5)
(15)

(%)
(25)
(35)
(45)
(55)
(65)
(75)

Apr-07

Apr-08

Apr-09

Apr-10
Aug-06

Aug-07

Aug-08

Aug-09
Dec-06

Dec-07

Dec-08

Dec-09
Premium/Discount to Infosys Avg. Historical Discount to Infosys


May 4, 2010 5


Profit & Loss Statement (Consolidated) (Rs cr)
Y/E March FY2008 FY2009 FY2010E FY2011E FY2012E
Gross sales 3,766 4,465 4,625 4,989 5,704
Less: Excise duty - - - - -
Net Sales 3,766 4,465 4,625 4,989 5,704
Other operating income - - - - -
Total operating income 3,766 4,465 4,625 4,989 5,704
% chg 28.6 18.5 3.6 7.9 14.3
Total Expenditure 3,377 3,172 3,493 3,791 4,390
Cost of Services 608 704 745 828 961
SGA 752.7 599.0 651.8 708.5 801.4
Personnel 1,577 1,868 2,096 2,254 2,627
Others 440.0 - - - -
EBITDA 389 1,293 1,133 1,198 1,314
% chg 78.7 232.4 (12.4) 5.8 9.6
(% of Net Sales) 10.3 29.0 24.5 24.0 23.0
Depreciation& Amortisation 79.6 109.7 133.9 159.4 181.3
EBIT 309 1,183 999 1,039 1,133
% chg 86.2 282.4 (15.6) 4.0 9.0
(% of Net Sales) 8.2 26.5 21.6 20.8 19.9
Interest & other Charges 6.2 2.5 218.4 119.0 34.0
Other Income 27.3 26.5 75.4 10.0 10.0
(% of PBT) 8.3 2.2 8.8 1.1 0.9
Share in profit of Associates - - - - -
Recurring PBT 330.5 1,207.3 855.6 930.0 1,108.6
% chg 150.0 180.2 (25.2) 9.8 19.2
Extraordinary Expense/(Inc.) (73.7) 74.8 8.5 - -
PBT (reported) 404.2 1,132.5 847.1 930.0 1,108.6
Tax 74.8 117.9 144.0 167.4 232.8
(% of PBT) 18.5 10.4 17.0 18.0 21.0
PAT (reported) 329.4 1,014.6 703.2 762.6 875.8
Add: Share of earnings of associate - - - - -
Less: Minority interest (MI) (0.5) 0.1 2.8 0.0 0.0
Prior period items - - - - -
PAT after MI (reported) 329.9 1,014.5 700.4 762.6 875.8
ADJ. PAT 256.2 1,089.3 708.9 762.6 875.8
% chg 276.6 207.5 (31.0) 8.9 14.8
(% of Net Sales) 8.8 22.7 15.1 15.3 15.4
Basic EPS (Rs) 27.2 83.3 57.3 60.7 67.8
Fully Diluted EPS (Rs) 25.6 77.6 53.6 58.3 67.0
% chg 276.6 207.5 (31.0) 8.9 14.8

May 4, 2010 6


Balance Sheet (Consolidated) (Rs cr)
Y/E Mar FY2008 FY2009 FY2010E FY2011E FY2012E
SOURCES OF FUNDS
Equity Share Capital 121.4 121.7 122.2 125.7 129.2
Preference Capital - - - - -
Reserves& Surplus 1,147 1,833 2,509 3,373 4,349
Shareholders Funds 1,268 1,954 2,631 3,499 4,478
Total Loans 30.0 - 1,400 800 -
Deferred Tax Liability (6.0) (19.6) - - -
Total Liabilities 1,292 1,935 4,031 4,299 4,478
APPLICATION OF FUNDS
Gross Block 635 900 1,100 1,275 1,450
Less: Acc. Depreciation 310 410 544 703 885
Net Block 325.0 490.3 556.4 572.0 565.7
Capital Work-in-Progress 164.0 154.1 204.1 229.1 179.1
Others 110.6 7.6 7.6 7.6 7.6
Investments 63 435 2,947 2,872 2,822
Current Assets 1,556 1,737 2,103 2,321 2,541
Cash 98 538 806 958 1,069
Loans & Advances 256.8 295.3 330.3 310.3 310.3
Other 1,202 904 967 1,052 1,162
Current liabilities 927 889 1,787 1,702 1,637
Net Current Assets 629 848 316 619 904
Mis. Exp. not written off - - - - -
Total Assets 1,292 1,935 4,031 4,299 4,478

Cash Flow Statement (Consolidated) (Rs cr)
Y/E March FY2008 FY2009 FY2010E FY2011E FY2012E
Profit before tax 404.2 1,132.5 847.1 930.0 1,108.6
Depreciation 79.6 109.7 133.9 159.4 181.3
Change in Working Capital (155.6) 131.7 819.3 (150.0) (175.0)
Less: Other income 33.7 (38.8) 78.1 10.0 10.0
Direct taxes paid 99.9 190.2 144.0 167.4 232.8
Cash Flow from Operations 194.6 1,222.5 1,578.2 762.0 872.1
(Inc)./ Dec in Fixed Assets (229.6) (251.3) (250.0) 200.0 125.0
(Inc)./ Dec. in Investments 38.9 (377.8) (2,512.0) (75.0) (50.0)
(Inc)./ Dec. in loans and advances
Other income 11.2 15.1 75.4 10.0 10.0
Cash Flow from Investing (179.5) (614.0) (2,686.6) 115.0 65.0
Issue of Equity 1.1 3.1 25.5 178.5 178.5
Inc./(Dec.) in loans 15.3 (30.0) 1,400 (600) (800)
Dividend Paid (Incl. Tax) 6.2 137.7 49.6 72.9 74.9
Others
Cash Flow from Financing 10.2 (164.6) 1,375.9 (494.4) (696.4)
Inc./(Dec.) in Cash 25.3 443.9 267.5 152.6 110.7
Opening Cash balances 67.4 92.7 538.2 805.7 958.3
Closing Cash balances 92.7 538.2 805.7 958.3 1,069.0

May 4, 2010 7


Key Ratios
Y/E Oct FY2008 FY2009 FY2010E FY2011E FY2012E
Valuation Ratio (x)
P/E (on FDEPS) 27.3 8.9 13.0 12.2 11.0
P/CEPS 21.9 8.0 10.9 10.1 9.1
P/BV 7.1 4.6 3.5 2.7 2.1
Dividend yield (%) 0.7 0.5 0.5 0.7 0.7
EV/Sales 2.4 1.8 1.5 1.3 1.0
EV/EBITDA 22.8 6.2 5.9 5.3 4.3
EV / Total Assets 4.0 2.9 1.2 1.1 0.9
Per Share Data (Rs)
EPS (Basic) 27.2 83.3 57.3 60.7 67.8
EPS (fully diluted) 25.6 77.6 53.6 58.3 67.0
Cash EPS 34.0 92.6 68.2 73.4 81.8
DPS 5.5 4.0 3.5 5.0 5.0
Book Value 104.5 160.5 215.1 278.4 346.6
Dupont Analysis
EBIT margin 8.2 26.5 21.6 20.8 19.9
Tax retention ratio 81.5 89.6 83.0 82.0 79.0
Asset turnover (x) 1.8 2.4 2.2 2.3 2.6
ROIC (Post-tax) 12.3 57.3 40.1 39.2 40.2
Cost of Debt (Post Tax) 5.3 1.7 5.3 1.9 1.8
Leverage (x) 0.0 - 0.5 0.2 -
Operating ROE 12.4 57.3 58.7 47.8 40.2
Returns (%)
ROCE (Pre-tax) 29.7 85.9 76.7 82.7 73.4
Angel ROIC (Pre-tax) 33.2 89.8 77.2 83.2 73.8
ROE 30.0 63.0 30.6 24.9 22.0
Turnover ratios (x)
Asset Turnover (Gross Block) 5.9 5.0 4.2 3.9 3.9
Inventory / Sales (days) - - - - -
Receivables (days) 106.3 73.8 75.5 75.5 72.4
Payables (days) 80.2 72.1 69.5 74.6 71.4
Working capital cycle (ex-cash) (days) 52.1 15.7 21.7 16.5 12.8
Solvency ratios (x)
Net debt to equity (0.0) (0.2) (0.6) (0.6) (0.6)
Net debt to EBITDA (0.1) (0.3) (1.4) (1.7) (2.1)
Interest Coverage (EBIT / Interest) 49.9 473.3 4.6 8.7 33.3

May 4, 2010 8


Research Team Tel: 022-4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.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 Securities 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,
and are for general guidance only. Angel Securities 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 Securities 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.

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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 Securities Limited nor its directors, employees and 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).

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 Rs 1 lakh for Angel and its Group companies.

Address: Acme Plaza, ‘A’ Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai - 400 059.
Tel : (022) 3952 4568 / 4040 3800

Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE:
INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946
Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM /
CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

May 4, 2010 9

Tech Mahindra Result Update 4qfy2010-040510

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