Tech Mahindra which is one of India?s top ten IT Services providers focusing on the telecom space. Tech Mahindra (TechM) services Telecom Service Providers (TSPs), Telecom Equipment Manufacturers (TEMs), Independent Software Vendors (ISVs) and Systems Integrators (SIs). It was formed in 1986 as a JV between M&M and British Telecom (BT). Key clients include BT, AT&T, Alcatel, Alltel, Convergys, Motorola, O2 and Vodafone. TechM is the only Indian player among the top 10 BSS vendors worldwide, as ranked by Gartner Dataquest.

We expect revenue and EPS CAGRs of ~8% and ~-5% respectively over FY09-12E. Satyam acquisition will help in diversifying vertical exposure and add size; however, we still await Satyam?s financials (expected in Jun?10). After the recent run-up, TechM is not really cheap on valuations, considering its muted growth prospects, based on our analysis.

However, the valuations of company?s organic business still carries higher domain (telecom) and client concentration (BT) risk. Given the risks and challenges at BT, Tech Mahindra will continue to struggle in the near term, in our view. The standalone business is valued at 8x Sep?11E EV/EBITDA (rolled forward from 8x FY11E), which is at a ~15% discount (previously ~10% discount) to more diversified players like HCL Tech. For Satyam, we use TechM?s share of Satyam?s Enterprise value based on the current market price of Satyam. Our target price of Rs 900 is based on 8x Sep?11E EV/EBITDA and considering TechM?s share of Satyam?s current EV. This valuation measure is appropriate as there are only limited disclosures for Satyam.

We rate TechM Medium Risk, in line with other mid-cap stocks. Key upside risks that could cause the stock to exceed our target price are: 1) any significant depreciation of the rupee against the USD/EUR/GBP; 2) a sharp upturn in IT spending among TSPs; 3) sharp ramp-ups in BTGS deal; 4) hiring rebounding in the next few quarters; 5) a large deal announcement; and 6) inorganic activity due to a stake sale or change in ownership.

Tech Mahindra continues to face multiple challenges in a positive industry demand environment?(a) BT (~46% of revenues) is unlikely to grow in the near term; (b) Satyam could face meaningful challenges on the supply side; (c) Cross currency and INR both pose challenges?given TechM has 56% of revenues coming from Europe (largely UK).

But key takeaways from the management meeting are, (a) BT business likely to be stable in the next few quarters, post the contract restructurings; (b) Rest of the business (non-BT) continues to do reasonably well; (c) TEM (Telecom Equipment Manufacturers) business remains challenged-now a very small proportion of revenues (less than 5%); (d) Margins-no meaningful offsets against wage hikes given pricing increases are unlikely in the near term.

Satyam?s business has stabilised. However, what remains to be seen is how much Satyam can benefit from the positive trends in the industry given what Satyam has gone through and the likely supply side challenges that the company may face. In the absence of relevant data, we value Satyam at current price in our SOTP. We lower our target price and estimates (by ~1-6% over FY10-12E) on TechM primarily on account of continuing challenges in the business and cross-currency movements. We value the core business at 8x Sep?11E EV/EBITDA (~15% discount to HCL Tech?s?fair given higher risks and lower exposure) ? our TP is lowered to Rs 900 (from Rs 910).