Six Month Call

Tech Mahindra CMP: 1245 Target 1: 1850 Target 2: 1890 Current Quote of Tech Mahindra Tech Mahindra (TechM) reported 4Q FY07 results slightly ahead of expectations. Revenue came in at Rs 8.75 bn (+13.6% QoQ; estimate of Rs 8.55 bn) whereas PAT (pre-exceptional items) was at Rs 1.96 bn (+17.6% QoQ; estimate of Rs 1.84 bn). Report on Tech Mahindra Highlights Strong sequential revenue growth story continues Revenue growth, in dollar terms, came in strong at about 16.0% on a sequential basis. However, this was offset by rupee appreciation to a certain extent leading to an overall revenue growth of 13.6% QoQ in rupee terms. Growth in this quarter has been mainly due to BT, which recorded a riseof 17.1% QoQ. As a result of this, the European geography also showed good growth at 18.3% on a sequential basis. Also, with five new clients in this quarter, TechM has maintained its historical trend of client additions. USD 1 bn BTGS deal update According to the management, the USD 1 bn deal bagged from BTGS is progressing as per plans. The groundwork of deciding the initial work to start with and transition is almost complete, with the first few projects starting to trickle in. As stated previously, the company expects the deal to take a J-shaped curve and significant revenues are expected only in 3Q FY08. TechM had also given an upfront discount of Rs 5.25 bn to BTGS and this amount has been fully expensed in this quarter. The USD 90 mn debt taken to make this payout has also been substantially repaid (only USD 4 mn remained at the end of March 2007) due to the strong internal accruals. Margins to remain under pressure TechM showed a QoQ operating margin decline of 155 bps in 4Q FY07. However, for the full year FY07, margins have improved by 358 bps. Going forward in FY08E, we expect a margin dip of 115 bps mainly due to the initial costs in the BTGS deal. However, I expect the margins to bounce back in FY09Eas the company has sufficient levers like the flattening of the employee pyramid, increased utilization levels, knowledge reuse and transaction based pricing. Thus, over FY07-09E, the margin dip is expected to be limited to about 85 bps. Employee additions continue to be strong Attrition, after being above the 20% levels for two consecutive quarters, has finally come below those levels (these exclude the BPO numbers). In this quarter, TechM has added 1,975 employees (+11.1% QoQ) on a net basis. ForFY07, the net additions have been 9,256 employees, a sharp 88% YoY increase. The utilization levels have been running a bit lower at 67%but this a fallout of the high growth as the company needs to hire aggressively in advance to meet expected project requirements. Maintain Buy with price target of Rs1,850 The expected target is 1850.

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