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Tech Mahindra to join Billion Dollar Club

June 20, 2007

Tech Mahindra is a Mahindra Group and British Telecom promoted company.

Total consolidated revenue was Rs 2929 crore in FY 2007. This was 136% higher compared with FY 2006. Operating profit margin (OPM) expanded 350 basis points (bps) to 25.1%, aided by a dip of 390 bps to 15% in selling, general and administration (SG&A) expenses. Operating profit was up 175% to Rs 736.60 crore. Other income declined 77% to Rs 7.70 crore on account of exchange fluctuations. Profit after tax (PAT) surged 160% to Rs 612.70 crore.

TML wrote off the Rs 524.90-crore upfront discount, treated as extraordinary item (EO). PAT after this EO dipped 63% to Rs 87.80 crore. Also, there was writeback of prior-period tax of Rs 33.90 crore in FY 2007. The resultant net profit after minority interest dipped 48% to Rs 121.60 crore.

Revenue contribution from North America was unchanged sequentially at 19%; Europe’s contribution increased to 76% from 73%, and rest of world (RoW) dipped 300 bps to 5%. [This means Tech Mahindra is not impacted like Infosys and TCS because of the fall in USD against INR]

Though TML saw a drop in OPM from 26.9% to 25.4% in Q4 March 2007 over Q3 December 2006, it increased from 21.6% to 25.1% for FY 2007. However, the margin is expected to be stable due to increasing utilisations (currently at a very modest level of 67%), increased offshoring (at 59% in Q4), more hiring of freshers, and SG&A leverage (50-100-bp improvement expected). These levers would provide substantial cushion against margin erosion due to the appreciation of rupee.

The $1-billion British Telecom Global Services (BTGS) deal is expected to commence in May 2007. Sizable revenue from the contract would be realised only end Q3 December 2007. The FY 2008 revenue from this deal could be around US$ 100 million.

In addition to the revenue potential from BTGS, BT is also contemplating jointly bidding with TML for the global rollout of 21 century networks (CN), which could open up larger revenue streams from 21CN (currently the company has over 1,000 resources on 21CN).

Non-BT customers such as AT&T and Alcatel are also expected to pick up momentum. The company has recently added new clients in both the telecom service providers (TSP) and telecom equipment manufacturers (TEM) segments in new geographies such as France, Italy, Australia, New Zealand and Egypt, which could lead to broadbasing of growth over the forthcoming quarters. The company is investing in new businesses such as managed services, BPO and testing, which could also add to the pace of growth from non-BT clients over the next few quarters.

TML is expected to register sales and net profit of Rs 4604.84 crore and Rs 926.5 crore, respectively. On a fully diluted equity of Rs 130 crore and face value of Rs 10 per share, EPS comes to Rs 71.2. The share price trades at Rs 1504. P/E works out to 21.1. As the company has fully written off upfront discount given on the BTGS deal, OPM from this deal will be better than market expectation.

Merill Lynch also has a BUY on Tech Mahindra with a Price Target of Rs 2,125.

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