Tech Mahindra?s revenue trajectory remained weak, down 2.5% q-o-q, in-line with our estimates, though BT business picked up (+4% in GBP terms), a first in 8 quarters.
Revenues came in-line. Consolidated revenue (ex-BT contract restructuring fee) declined 2.5% qoq to $272m. BT revenues grew 3.6% to ?65m, a surprise, after 2 quarters of qoq decline. However, non-BT revenues declined 6% qoq due to cessation of business from Etilsalat DB and S-Tel, whose India telecom licences were cancelled during the quarter. TechM expects revival in 1Q13; build-up in deal pipe-line is long-range positive.
Margin management was better. Normalised Ebitda margin was up 61bp to 13.8% (vs. our 12.9% est.). Headcount rationalization (down 5% qoq) pushed down manpower costs 3% qoq; however, SG&A expenses picked up ostensibly due to the build-up in deal-pipeline (TechM spoke of 6-7 $25-100m TCV deals under negotiations). Higher FX loss (R4,090 lakh versus our R500 lakh gain est) kept PAT (ex-Satyam) at R140 crore (-3% qoq), below estimates, despite R2,420 lakh one-time tax refund.
While BT business will likely remain volatile ? TechM explained 4Q12 growth was from one-time discretionary spend ? the extended re-bid process suggests tougher vendors? stance, including TechM?s, in our view. While the volume/pricing trade-off could keep BT revenue growth subdued, we expect it to be margin positive. Build-up in managed services deal pipeline is also incrementally positive.
However, back-ended profitability in such deals could marginalise the potential gains from a depreciating R. Thus, time-lines are critical; we would seek further clarity to review our forecasts.
While valuations (at 7x FY13F EPS) are undemanding, we see few near-term triggers ? decelerating re-bid process could keep BT revenue flow volatile. Inexpensive valuations lend strong down-side support; however, missing immediate-term triggers could keep the stock ranged. Turnaround in Satyam stays better and more visible, in our view.
