We retain our ‘add’ rating on Tech Mahindra Ltd (TechM) shares with an increased target price of Rs 1,500 (earlier Rs 1,430), valuing the company at 11x earnings. While the company still has a lot of work to do on the enterprise side, improved deal wins give us confidence about the near term. Inexpensive valuations of 9.8x FY15e EPS offer good upside.
Tech Mahindra said it was confident of growing in line with or bettering industry growth on an organic basis in FY14 and FY15. The recent depreciation of the rupee against the dollar offers Tech Mahindra comfort in keeping Ebitda margins at 20-21%. While management expectations of organic growth in FY14 appear stretched, recent deal wins offer the comfort of improved growth trajectory. We forecast 7.2% organic revenue growth in FY14.
The management also reiterated its stretched revenue target of $5 billion by 2015. Tech Mahindra indicated the path to this revenue target had been drilled down to unit-level targets though it did not wish to share specifics.
While inorganic initiatives will be an important element in achieving the $5-billion number, Tech Mahindra will not acquire just to bulk-up or meet a target. Instead, acquisitions will focus on (a) geographic expansion, (b) capabilities, especially in financial services, and (c) platforms. Tech Mahindra is a leader in the telecom vertical and is confident of strong growth despite severe headwinds.