We maintain our 'hold' rating on Tech Mahindra Limited, but tweak our estimates and increase the price target to Rs 1,030 (Rs 1,020 earlier). Our revised price target is at a discount to its closest peer HCL Tech and is based on 9x the merged entity’s (Mahindra Satyam) FY15e EPS.
The company reported good revenue growth in the fourth quarter. At $353 million, revenue grew ~7% q-o-q and were ahead of our expectations ($337 million).
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Organic growth was 1.5% q-o-q with volumes growing ~3% and realisations declining 1.5% q-o-q. Further, Comviva was integrated for the full quarter and gave incremental revenues of more than $20 million. The management has suggested seasonality with typically H2 of the fiscal year being stronger for Comviva.
British Telecom is the top client of Tech Mahindra and has been under pressure for quite some time. However, revenues in constant currency were flattish this quarter and should come as a relief to investors. Operating margins at 16.8% were in line with our expectations (16.9%) despite the much stronger than anticipated growth as the cross currencies took away ~150 bps and the business mix was unfavorable given ramp-ups in a few accounts that happened on-site.
However, some concerns continue to linger. Telecom as an industry is challenged for most vendors and attrition in IT Services has risen 2% q-o-q again. DSO, at 95 days, remains high — though it did come off on a q-o-q basis.