J P Morgan Overweight on Tech Mahindra

J P Morgan initiates coverage on Tech Mahindra with Overweight rating and a Dec-07 price target of Rs1,700, implying 13% upside.

JPM expects a 42% revenue CAGR and 38% EPS CAGR in FY07-09 led by: (1) strong growth of two largest clients—BT and AT&T; (2) diversifying customer base; (3) strong offshoring trend in TSP space; and (4) widening service offering. JPM expects a 37% revenue CAGR from British Telecom (TM’s largest customer with~60% of revenues) due to BT’s aggressive offshoring drive and recently signed US$1B deal with BT Global Services. JPM expects a 45% revenue CAGR from AT&T (second-largest client) due to offshore vendor consolidation, stake in TM, and low base.

JPM is expecting Tech Mahindra to report an EPS of Rs 72.0 for FY08 and Rs 102 for FY09. At these EPS’ JP Morgan target is slightly on the lower side because of strong management and better than expected growth story.

We at DalalStreet.Biz continue to be bullish on the prospects of Tech Mahindra and rate it as an aggressive BUY with a Price target of Rs 1,900. Tech Mahindra will enter the big league software companies in FY08 and will see a re-rating for its stock.