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Tech Mahindra – Company Analysis and Review

October 28, 2006

Tech Mahindra Limited is promoted by the Keshub and Anand Mahindra Group. Their IPO was reasonably priced and was heavily oversubscribed.

I have been optimistic about the prospects of this company mainly because of the promoters background on Dalal Street and ethical business practices. (Anand Mahindra refused to make any forward looking statements for the company after announcing the Q2-07 results).

Here is a brief research and analysis of their performance.

Tech Mahindra’s QoQ growth in Income and PAT(in Rs crores) since Q2-2006 are as follows.
Q2-2006. Income 257.64 (+4.89%) and PAT 37.4(+10.9%)
Q3-2006. Income 340 (+32.2%) and PAT 75 (+100%)
Q4-2006. Income 421.2 (+23.8%) and PAT 89 (+18.7%)
Q1-2007. Income 587 (+39.5%) and PAT 106 (+19%) 100 ? Not Sure.
Q2-2007. Income 647 (+10%) and PAT 141 (+33%)

Their has been a phenomenal growth in terms of Income and PAT for the past 6 quarters. Why is this necessary ? Read my Satyam Computers Case Study. Fund Managers like to chase stocks which report consistent growth in PAT. Tech Mahindra gets A+ for all other parameters except its Income concentration from British Telecom, another promoter. This issue is also mitigated since their is no slowdown expected in the European Telecom Market.

Earnings Front:
Now lets have a look at Tech Mahindra’s YoY growth in Income and PAT

FY2005 Income 954.19 (+24%) and PAT 102 (+51.3% )
FY2006 Income 1276.6(+33%) and PAT 235 (+129%)
For the Half year ending, sept-30-2006, it’s income was 1204.4 and PAT of 241.4.

DalalStreet.Biz to mitigate risks models on 3 fronts, Conservative, Moderate and Optimistic for short term predictions (6 Months to 12 Months).

Conservative Estimates:
Half Yearly Income and earnings 1204.4 and 241.4. Assume it grows at 10% QoQ for the next 2 quarters which will bring it’s PAT for the whole Year to 241 + 155 + 170 = 566 crores.
FY2007 EPS Estimated = 48.83 after dilution say Rs45. Discounting its FY07 earnings @ 20 times, Price Target for the stock will be Rs900.

Moderate Estimates:
Half Yearly Income and earnings 1204.4 and 241.4. Assume it grows at 15% QoQ for the next 2 quarters which will bring it’s PAT for the whole Year to 241 + 162 + 186 = 589 crores
FY2007 EPS Estimated = 50.81 after dilution say Rs48. Discounting its FY07 earnings @ 22.5 times, Price Target for the stock will be Rs1080

Optimistic Estimates:
Half Yearly Income and earnings 1204.4 and 241.4. Assume it grows at 15% QoQ for the next 2 quarters which will bring it’s PAT for the whole Year to 241 + 169 + 203 = 613 crores
FY2007 EPS Estimated = 52.89 after dilution say Rs50. Discounting its FY07 earnings @ 25 times, Price Target for the stock will be Rs1250.

Take either of the estimation model and you will see its PAT grow 100% YoY. Fund Managers would also like to know the revenue mix of different verticals and different geographies before they initiate a coverage. In any case we are upbeat on Tech Mahindra and we also believe it will be a $1 Billion company by FY2009 and not a year later FY2010 as projected by its management during IPO.

Update: Many on the MoneyControl board think I have been very conservative in my expectations of the stock price. Maybe, I will always be so and anything over it is a bonus 😉

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