Maintain buy on Tech Mahindra (TechM) even as up-side in the near-term could be limited after ~61% return in the last 12 months. At 17.1x FY16e and 14.4x FY17e EPS, the stock is above its 5-year average, justifiably given the improvement in revenue growth and margins following merger with Satyam; and increasing irrelevance of the pressures in BT. Our target price of R3,200 discounts FY17e EPS by 16x, following expectation of sustained above-industry growth over the medium term.
TechM’s Q3FY15 constant currency revenue growth of 4.9% q-o-q was marginally ahead of our estimate of 4.2%. Excluding contribution from integration of Mahindra Engineering Services, organic constant currency revenue growth was 3.8% q-o-q, led by Enterprise segment this quarter. Ebitda margin is 20.2% in line with our estimate of 20.3%. PAT before special adjustments is R777 crore, up 8% q-o-q, below our estimate of R7.97 billion.
Lower PAT was on the back of other income at R1,900 crore, compared to our estimate of R8,270 crore. Wage hikes effective from January 1, 2015 and integration of Lightbridge
TechM expects more colsilidation in the telecom vertical in CY15. While this could be an opportunity for the company over the medium to long term, there could be an impact on the decision cycles for deals in the pipeline.
By Motilal Oswal