Home Tech Mahindra – Stock of the Month (May 2015)

Tech Mahindra – Stock of the Month (May 2015)

16 April, 2015

Price: Rs. 644.00

Tech MahindraTech Mahindra Limited (“TechM” or the “Company”) operates mainly into two sectors i.e. Telecom business and Enterprise Solutions business.

Telecom business provides consulting-led integrated portfolio services (to customers which are telecom equipment manufacturers, telecom service providers) and IT infrastructure services, business process outsourcing as well as enterprise services (BFSI, Retail & Logistics, Manufacturing, Healthcare, Life Sciences, etc.) of Information Technology (IT) and IT-enabled services.

Enterprise solutions business provides range of IT services, including IT enabled services, application development & maintenance, consulting & enterprise business solutions, engineering solutions and infrastructure management services to customers operating in diverse industries including insurance, banking and financial services, manufacturing, telecommunications and transportation.


Strong Financial Position| 5th Largest IT Company

TechM has shown consistent growth over the period FY2013 Q3 – FY2015 Q3. Its net revenue from operations over this period grew at an impressive CQGR of 26.28 %. For FY 2014, net revenue from operations increased by 173.99 % to Rs. 18,831.38 Cr. from Rs. 6,873.08 Cr. and Profit after Tax increased by 137.80 % to Rs. 3,028.81 Cr. from Rs. 1,287.81 Cr. The Company has reserves in excess of Rs. 8,947.00 Cr. as of March 31, 2014.

Financial Performance

Inorganic growth gaining momentum

The Company has made some strategic acquisitions over the past few years, which have enabled TechM to expand its services and addressable market for future growth. Large deal wins and inorganic initiatives have played an important role in scaling the business. The Company has been able to increase its presence in other segment like healthcare and retail due to active acquisitions. This has helped the Company to decrease it’s over exposure to telecom sector (51 %). Tech Mahindra is aggressively looking at acquisitions to increase its market share which will help the Company to increase its revenue in the coming years. Besides venturing into new verticals, Tech Mahindra is also looking to sell some of the businesses which are not profitable in a view to improve operating margins.

Merger with Satyam | Strong Balance Sheet

One of the most important events is the merger of Tech Mahindra Limited and Satyam Computer Services Limited. Post the merger, the Company becomes one of top 5 IT service providers in India. The merger helped significantly to increase the scale of operations of the Company and diversify the revenues base. Before the merger, the Company was primarily a telecom-focused firm but now has access to diverse verticals such as financial services, retail, logistics and transport, health care, and life sciences.

This has helped the Company in strengthening its balance sheet and cash flows. For FY 2014, the merged entity revenue stood at Rs. 18,831 Cr., EBITDA at Rs. 4,184 Cr., and Profit after Tax at Rs. 3,029 Cr. while the net cash in merged entity was Rs. 32,361 million as of March 31, 2014.

The Company’s future revenue growth is likely to be from the manufacturing vertical. Its manufacturing expertise as a result of the Satyam acquisition and strength in ERP is likely to boost growth going forward. Manufacturing segment has seen strong client and large deal wins, over the last few quarters which drives confidence on sustenance of strong growth going forward.


Intense Competition

IT services industry is highly competitive globally with competition arising across from Indian IT companies.

Also see: Market Performance of IT Companies

Mid Cap IT Companies is gaining an edge over larger companies which have further led to intense competitive environment. The Mid cap companies are quickly eating up the market share of large IT players due to certain advantages such as:

►         Cost effectiveness;

►        Niche service capabilities;

►        Focused client servicing approach;

►        Ability to cater to clients of any size whereas large IT companies target large orders and compete with global players.

From a valuations perspective also, mid-cap companies in India offer the best investment value. Companies such as Infosys, TCS, HCL Technologies and Wipro are trading at a price-to-earnings (P/E) ratio of 15-22, while mid-cap companies such as NIIT Technologies, Mindtree and Hexaware are trading at 7-11 times P/E multiple.

High concentration in Telecom Sector

TechM has high concentration towards the telecom industry. For FY2014, telecom industry has high revenue contribution share of 51% to the total business. This is much higher compared to leading Indian and global IT peers of TechM (according to Company’s Annual Report). There is strong need for the Company to de-risk its business which has become even more important as telecom companies have been reducing their expenditure due to their vague growth prospects.