Tech Mahindra Equity Research

Date of Research – 21 January 2016

Price – Rs. 508.65

About the Company

Incorporated in 1986, Tech Mahindra Limited (“Tech Mahindra” or the “Company”) is part of the USD 15.9 billion Mahindra Group and is a leading global systems integrator and business transformation consulting organization, focused primarily on the telecommunications industry.

Tech Mahindra operate across a broad spectrum, including Business Support Systems (BSS), Operations Support Systems (OSS), Network Design & Engineering, Next Generation Networks, Mobility Solutions, Security consulting and Testing. The solutions portfolio includes Consulting, Application Development & Management, Network Services, Solution Integration, Product Engineering, Infrastructure Managed Services, Remote Infrastructure Management and BSG (comprises BPO, Services and Consulting).

Tech Mahindra has successfully implemented more than 18 Greenfield Operations globally and has over 140 active customer engagements mostly in the Telecom sector. The Company has been involved in about 9 transformation programs of incumbent telecom operators.

The Company has a global footprint through operations in more than 31 countries with 17 sales offices and 15 delivery centers. Its development centers are ISO 9001:2008, ISO 20000, ISO 27000 & BS25999 certified.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations6,873.0818,831.3822,621.2726,494.23 29,140.84 
Expenses5,448.8414,647.6418,468.4122,175.82 24,956.41  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)1,424.244,183.744,152.864,318.41 4,184.43  
Depreciation199.96522.18611.38761.97 978.06  
Finance Costs103.0479.8829.8496.11 128.59  
Other income(74.70)113.04106.48417.60 777.56  
Exceptional items(120.00)(138.95)2.34  
PBT1,046.543,814.723,618.124,016.88 3,853.00  
Tax235.54752.34959.56860.15 1,002.13  
PAT (before Minority Interest and share of Associates)811.003,062.382,658.563,156.73 2,850.87  
Profit/ (loss) attributable to Minority Interest19.6233.5731.0341.32 – 
Share of profit / (loss) of Associates(496.43)(0.14)(2.63) – 
Consolidated Profit / (Loss) for the year1,287.813,028.812,627.673,118.04 2,850.87  

Profitability Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio20.7222.2218.3616.30 14.36 
Net Profit Margin Ratio11.8016.2611.7511.91 9.78 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital126.00128.10233.50480.40483.90 
Share application money pending allotment0.301.500.301.40 
Reserves & Surplus3,923.405,297.208,947.0011,768.2013,882.40 
Net worth (shareholders funds)4,050.905,425.609,182.0012,248.9014,367.70 
Minority Interest108.90143.80160.10202.00 
Long term borrowings600.00300.0019.0046.00196.70 
Current liabilities1,650.102,718.104,574.905,708.606,956.00 
Other long term liabilities and provisions618.10431.802,019.901,684.501,784.60 
Total Liabilities6,919.108,984.4015,939.6019,848.1023,507.00 


Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets849.60938.202,296.602,872.303,238.30 
Noncurrent Investments3,427.103,924.201,219.401,298.701,324.40 
Current assets2,204.203,091.2010,547.2012,252.6014,945.10 
Long term advances and other noncurrent assets338.40539.00929.401,306.101,706.00 
Deferred Tax Assets99.80151.10383.00390.10557.50 
Goodwill on consolidation (net)340.70564.001,728.301,735.70 
Total assets6,919.108,984.4015,939.6019,848.1023,507.00 

Efficiency Analysis

ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
ROE / RONW27.0423.7432.9921.4521.97 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)6,873.0818,831.3822,621.2726,494.23 29,140.84 
Growth (%)25.20 %173.99 %20.13 %17.12 % 9.99 % 
PAT (Rs. Cr.)1,287.813,028.812,658.563,156.73 2,850.87  
Growth (%)17.56 %137.80 %(13.19 %)18.74 % (9.69 %) 
Earnings Per Share – Basic (Rs. )100.85130.2527.4632.34 32.14 
Earning Per Share – Diluted (Rs. )96.68126.7826.7431.67 31.64 
Price to Earnings10.9614.4324.2415.01 12.49 

Dividend History

The Company has maintained an average dividend yield of 1.20 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Tech Mahindra’s average current ratio over the last 5 financial years has been 1.65 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Tech Mahindra’s average long term debt to equity ratio over the last 5 financial years has been 0.08 times which indicates that the Company operates with low level of debt and is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Tech Mahindra’s average interest coverage ratio over the last 5 financial years has been 44.88 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Tech Mahindra reported a promoter holding of 36.21 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 47.90 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.