Maintain ‘outperform’ on Tech Mahindra (TechM) with price target of Rs 2,780 per share, which implies 15x FY16e EPS (ex-treasury shares).We believe valuation catch-up with peers is now over and a revival in the upgrade cycle is the key for an incremental move. We adjust the forecasts marginally to build a more conservative view on near-term margins.
In our view, TechM is no longer a ‘work-in-progress’. Since the formal merger with Satyam, the company has implemented multiple changes in its sales-force management, account planning processes and market positioning. We believe the revamp is nearing completion and management’s focus is now on execution.
We foresee strong revenue momentum. The company is on track to growing organic revenue to a $4 billion plus run-rate over the next five quarters with acquisitions likely to add the balance for its stated goal of $5 billion by Q3FY16. Its deal pipeline has expanded five times and win-rate 50% in the erstwhile Satyam business over the past four quarters, while it continued to gain market share in the telecom vertical.
Investment in revenue growth perusal has affected profitability. TechM expects ebitda margin to stay around 20% in the near-term. However, we see multiple levers – namely offshore leverage, utilisation and pyramid.
By Standard Chartered
