Analyst Corner: Maintain 'Add' on TechM

Updated: Jun 27 2013, 06:14am hrs
We maintain our add rating on Tech Mahindra with a 12-month forward target price of R1,100. The stock trades at 10x FY14e earnings adjusted for deferred revenues. In our view, valuations are inexpensive, which drive our positive view on the stock.

The Tech Mahindra-Satyam merger is finally complete after multiple delays. The company is working on the final organisation structure, which will be communicated in due course. Tech Mahindra is following the pooling-of-interest method of accounting. This essentially means line-by-line consolidation of balance sheet items with the difference between assets and liabilities adjusted against reserves. No goodwill will get created in the consolidation of financial statements.

The company will recognise R1,230 crore on the liability side of balance sheet as amounts pending investigation suspense account. This liability has been created after Satyam post the letter of erstwhile chairman, received letters from 37 companies, claiming R1,230 crore was lent as temporary advances. These 37 companies have asked for refund of this claimed temporary advance along with interest at 18%.

Claims by income tax authorities and enforcement directorate will be recognised as contingent liabilities by Tech Mahindra. The merger process will result in the creation of 59 million treasury shares, of which 35 million shares will be extinguished. We are not sure about the accounting entry but believe that paid-up capital will increase without corresponding increase in reserves and surplus. Net cash after the merger stands at R2,520 crore at end-FY13.

Satyam had declared dividend of R0.6 per share. Since the share swap will materialise before dividend payout, investors will be paid an equivalent dividend declared by Tech Mahindra.