We maintain our ?add? rating on Tech Mahindra (TechM) Ltd. Our positive view is predicated on growth catch-up with peers and inexpensive valuations. We expect growth of TechM to be better than peers.
We raise FY15-16e EPS by 4-8%. The stock trades at an inexpensive 12x FY15e earnings even after the recent run-up. We raise our target price to R2,100 from R2,000, led by revision in our earnings estimates. Our target multiple on the company is still at a discount to other Tier-I players, noting high client concentration and relatively higher-risk business model.
TechM delivered another robust quarter with 4.4% sequential revenue growth, 1.8% ahead of our estimate. Growth was broad-based and powered by North America geography. The company is well poised for better-than-industry revenue growth in FY15e, led by market share gains in telecom vertical and revival in spending in the enterprise business.
North America geography grew 11.5% sequentially; a chunk of this growth was led by ramp-up of a large deal. Growth was impressive across verticals ? financial services grew 16% q-o-q and telecom by 4.4%. Management also indicated that there were no furloughs, which helped the overall revenue growth numbers.
Gross profit margin declined 90 bps to 38.7% due to transition costs in large deals. Ebitda margins at 23.2% was flat sequentially and 50 bps ahead of our estimate, largely due to 80 bps decline in SG&A expenses. Recurring net income of R663 crore (down 7.7% q-o-q) was 3.2% ahead of our estimate. Recurring net income was impacted by forex loss of R141 crore.
Kotak Institutional Equities
