1QFY2018 Result Update | IT

August 2, 2017

Tech Mahindra

BUY

CMP

`385

Performance Highlights

Target Price

`533

(` cr)

1QFY18

4QFY17

% chg (QoQ)

1QFY17

% chg (YoY)

Investment Period

12 Months

Net revenue

7,336

7,495

(2.1)

6,921

6.0

EBITDA

935

899

4.0

1,029

(9.2)

Stock Info

EBITDA margin (%)

12.7

12.0

75bp

14.9

(213)bps

Sector

Adj. PAT

798

588

35.8

750

6.5

Market Cap (` cr)

37,589

Source: Company, Angel Research;

Net Debt (` cr)

-6,370

For 1QFY2018 Tech Mahindra posted good set of numbers. The sales came in at

Beta

0.8

US$1,138mn (US$1,127mn expected) v/s. US$1,131mn in 4QFY2017, a qoq

52 Week High / Low

515/358

growth of 0.6%. In Rupee terms, sales came in at `7,336cr (`7,262cr expected)

Avg. Daily Volume

2,93,915

v/s. `7,495cr in 4QFY2017, a qoq dip of 2.1%. On operating front, the EBIT

Face Value (`)

margins came in at 9.4% (8.6% expected v/s. 8.2% in 4QFY2017, a qoq

BSE Sensex

32,515

expansion of 117bps, mainly on the back of base effect. Consequently, the PAT

Nifty

10,077

came in at `798cr (`624cr expected) v/s. `588cr in 4QFY2017, a qoq growth of

Reuters Code

TEML.BO

35.8%. We maintain our Buy rating on the stock.

Bloomberg Code

TECHM@IN

Result highlights: The sales came in at US$1,138mn (US$1,127mn expected)

v/s. US$1,131mn in 4QFY2017, a qoq growth of 0.6%. In Rupee terms, sales

came in at `7,336cr (`7,262cr expected) v/s. `7,495cr in 4QFY2017, a qoq dip

Shareholding Pattern (%)

of 2.1%. The sales growth during the quarter was driven by USA, which

Promoters

36.2

constituted 46.8% of sales in 1QFY2018 v/s. 45.1% in 4QFY2017, while ROW

MF / Banks / Indian Fls

16.7

dipped to 23.4% of sales in 1QFY2018 v/s. 25.3% of sales in 4QFY2017. On

FII / NRIs / OCBs

36.2

operating front, the EBIT margins came in at 9.4% (8.6% expected) v/s. 8.2% in

Indian Public / Others

11.0

4QFY2017, a qoq expansion of 117bps, mainly on the back of base effect.

Consequently, the PAT came in at `798cr (`624cr expected) v/s. `588cr in

4QFY2017, a qoq growth of 35.8%.

Abs.(%)

3m 1yr

3yr

Outlook and valuation: We expect a CAGR of 8.0% and 7.2% in USD and INR

Sensex

8.7

16.1

25.6

revenue respectively over FY2017-19E. The PAT is expected to grow at a

Tech Mahindra

(7.6)

(21.3)

(28.3)

CAGR of 8.6% over FY2017-19E. We maintain our Buy rating on the stock with

a Target Price of `533.

3-year price chart

Key financials (Consolidated, Indian GAAP)

Y/E March (` cr)

FY2016

FY2017

FY2018E

FY2019E

Net sales

26,494

29,141

31,015

33,496

% chg

17.1

10.0

6.4

8.0

Net profit

3,118

2,813

3,102

3,315

% chg

18.7

(9.8)

10.3

6.9

EBITDA margin (%)

16.3

14.4

15.0

EPS (`)

35.8

32.3

35.6

38.1

P/E (x)

10.6

11.7

10.7

10.0

P/BV (x)

2.3

2.0

1.8

1.6

Source: Company, Angel Research

RoE (%)

21.4

17.1

17.0

16.3

RoCE (%)

20.1

15.6

16.1

15.9

EV/Sales (x)

1.3

1.2

1.1

1.0

Sarabjit kour Nangra

EV/EBITDA (x)

7.9

8.4

7.5

6.8

+91 22 3935 7800 Ext: 6806

Source: Company, Angel Research; Note: CMP as of July 31, 2017

[email protected]

Please refer to important disclosures at the end of this report

Tech Mahindra | 1QFY2018 Result Update

Exhibit 1: 1QFY2018 performance (Consolidated, Indian GAAP)

(` cr)

4QFY17

3QFY17

% chg (qoq)

4QFY16

% chg (yoy)

FY17

FY16

% chg (yoy)

Net revenue

7,336

7,495

(2.1)

6,921

6.0

29,141

26,496

10.0

Cost of revenue

5,282

5,479

(3.6)

4,881

8.2

20,566

18,323

12.2

Gross profit

2,054

2,017

1.9

2,040

0.7

8,575

8,173

4.9

SG&A expense

1,120

1,118

0.2

1,011

10.7

4,390

3,853

13.9

EBITDA

935

899

4.0

1,029

(9.2)

4,184

4,320

(3.1)

Dep. and amortization

247

284

(12.9)

202

22.2

978

762

28.4

EBIT

688

615

11.8

827

(16.8)

3,206

3,558

(9.9)

Interest

16.4

37.0

134

39.4

Other income

411

238

72.6

246

67.0

950

557

70.6

PBT

1,062

821

29.3

1,046

1.5

4,023

4,017

0.1

Income taxes

270

232

16.5

247

9.2

1,002

860

16.5

PAT

792

590

34.3

799

(0.9)

3,021

3,157

(4.3)

Minority interest

(99.7)

PAT after minority interest

792

590

34.3

753

5.1

3,021

3,118

(3.1)

Profit from associates

(2)

(40)

Exceptional item

Reported PAT

798

588

35.8

750

6.5

2,980

3,118

(4.4)

Adj. PAT

798

588

35.8

750

6.5

2,980

3,118

(4.4)

Diluted EPS

8.3

6.1

35.8

7.8

6.5

31.0

32.4

(4.4)

Gross margin (%)

28.0

26.9

110bp

29.5

(147)bps

29.4

30.8

(142)bp

EBITDA margin (%)

12.7

12.0

75bp

14.9

(213)bps

14.4

16.3

(195)bp

EBIT margin (%)

9.4

8.2

117bp

11.9

(257)bps

11.0

13.4

(243)bp

PAT margin (%)

10.9

7.8

304bp

10.8

5bps

10.2

11.8

(154)bp

Source: Company, Angel Research

Exhibit 2: 1QFY2018 - Actual Vs Angel estimates

(` cr)

Actual

Estimate

% Var

Net revenue

7,336

7,262

1.0

EBITDA margin (%)

12.7

12.6

10bps

PAT

798

624

27.9

Source: Company, Angel Research

Revenue growth led by USA

For 1QFY2018 Tech Mahindra posted good set of numbers. The sales came in at

US$1,138mn (US$1,127mn expected) v/s. US$1,131mn in 4QFY2017, a qoq

growth of 0.6%. In Rupee terms, the sales came in at `7,336cr (`7,262cr expected)

v/s. `7,495cr in 4QFY2017, a qoq dip of 2.1%. On Constant Currency (CC)

terms, the company posted a 0.6% QoQ de-growth during the quarter.

In terms of geography, USA was the major growth driver, it constituted 46.8% of

sales, a qoq growth of 4.4%, while ROW was the key damper constituting 23.4%

of sales, posting a qoq de-growth of 6.9%. Europe, on the other hand posted a

qoq growth of 1.3%.

In terms of the industries, the manufacturing came in at 19% of sales, posting a

qoq growth of 1.1%. BFSI was the main driver, which lead the segment,

contributing around 14.4% of sales, posting a qoq growth of 2.7%. The key

domain Retail, Transport & Logistics, posted a qoq growth of 5.2%. Also, the

Technology, Media & Entertainment, posted a qoq de-growth of 2.6%.

August 2, 2017

Tech Mahindra | 1QFY2018 Result Update

Hiring and client metrics

During the quarter, the company reported a net addition of (1,713) employees,

taking its overall headcount to 115,980. The BPO headcount currently stands at

30,322 and was the only division to witness additions. Attrition (on LTM basis) was

at 17%.

Exhibit 6: Employee metrics

Particulars

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

Software professionals

73,590

78,404

80,858

82,403

78,996

BPO professionals

27,326

27,669

29,372

28,414

30,322

Sales & support

6,300

6,813

6,865

6,876

6,662

Total employees

107,216

112,886

117,095

117,693

115,980

Attritions (%)

Source: Company, Angel Research

Exhibit 7: Trend in utilization rate

Source: Company, Angel Research

The company added 21 new clients during the quarter, taking the active client

base to 864 (v/s. 843 in 4QFY2017), with 5 clients added in US$20mn-50mn+

bracket and other additions mainly in the US$1mn-5mn+ bracket.

During the quarter, deals with a TCV of US$325mn were won, which included a

large networking deal in Communications and a deal in the Manufacturing

vertical.

August 2, 2017

Tech Mahindra | 1QFY2018 Result Update

Exhibit 8: Client metrics

Particulars

1QFY17

2QFY17

3QFY17

4QFY17

1QFY18

Total active clients

807

818

837

843

864

US$1mn-5mn

207

197

228

220

238

US$5mn-10mn

US$10mn-20mn

US$20mn-50mn

US$50mn+

Source: Company, Angel Research

Operating margin expands

On operating front, the EBIT margins came in at 9.4% (8.6% expected) v/s. 8.2%

in 4QFY2017, a qoq expansion of 117bps, mainly on the back of base effect.

Margins were benefited by the absence of one-time costs associated with the LCC

restructuring that negatively impacted margins in the previous quarter. The

company expects continued margin recovery going forward despite an upcoming

wage hike. This would be driven by improvement in LCC margins, improved

utilization & increased thrust on Automation.

Exhibit 9: Margin trend (%)

Source: Company, Angel Research

Investment arguments

Growth prospects decent: The Management is more optimistic as compared to

what it was at the same time last year. It has also been optimistic about the

prospects of recently acquired entities. On Margin front, the company faces the

usual 1QFY2018 headwinds of visa expenses and Comviva margin contraction.

Any improvement, on back of synergies and productivity gains will only start

reflecting from 2QFY2018. We expect a CAGR of 8.0% and 7.2% in USD and INR

revenue respectively over FY2017-19E. On EBIT front, we expect the EBIT to be

around 15.0% v/s. 14.4% in FY2017.

Inorganic growth initiatives to augment well for company: The company has been

active in the M&A space, with it having acquired Satyam a few years back, to

August 2, 2017

Tech Mahindra | 1QFY2018 Result Update

acquiring LCC and Softgen recently. Softgen’s and LCC’s acquisition was

consolidated in 4QFY2015. LCC is one of the world’s largest independent global

providers of network engineering services to the telecommunications industry with

an estimated annual revenues of more than US$400mn (CY2014; the effective

run-rate for the business is pruned down to US$200-220mn annualized), with

workforce of over 5,700 network professionals across five continents and more

than 50 countries. With this acquisition, Tech Mahindra will also be addressing a

rapidly growing market opportunity, as telecommunications companies and

enterprises accelerate their network upgrade cycle.

Outlook and valuation

Given the recent acquisitions and healthy order pipeline, the company is expected

to post a healthy US$ and INR CAGR of 8.0% and 7.2% respectively over FY2017-

19E. However, the acquisition of LCC will be margin dilutive in the near term,

leading the FY2017 EBDITA margin to drop to 14.4% from 16.3% in FY2016. The

company, given its success in turnaround of its earlier acquisition (Satyam),

believes it would be able to do the same with the recent acquisitions and would be

able to get close to achieving the 20% EBIT levels in future. Given the favorable

valuation on EV/sales front, where it trades at a significant discount to its peers, we

believe the stock should witness uptrend once the profitability returns to its mean

average. We maintain a Buy rating on the stock.

Exhibit 10: Key assumptions

FY2018E

FY2019E

Revenue growth (US$)

8.0

USD-INR rate (realized)

66.7

Revenue growth (`)

6.4

8.0

EBITDA margin (%)

15.0

Tax rate (%)

26.0

EPS growth (%)

10.3

6.9

Source: Company, Angel Research

August 2, 2017

Tech Mahindra | 1QFY2018 Result Update

Exhibit 11: One-year forward PE (x)

Source: Company, Angel Research. Note: P/E includes profits of Mahindra Satyam from FY2012

Exhibit 12: Recommendation summary

Company

Reco

CMP

Tgt Price

Upside

FY2019E

FY2017-19E

FY2019E

(`)

(%)

EBITDA (%)

P/E (x)

EPS CAGR (%)

EV/Sales (x)

RoE (%)

HCL Tech

Accumulate

889

1,014

14.1

20.9

13.2

6.2

1.8

20.6

Infosys

Buy

1011

1,179

16.6

26.0

14.3

5.3

2.2

19.6

TCS

Accumulate

2,494

2,651

6.3

27.6

16.0

7.8

3.1

29.8

Tech Mahindra

Buy

385

533

38.4

15.0

10.1

8.6

1.0

16.3

Wipro

Buy

289

20.3

15.2

4.4

1.2

13.4

Source: Company, Angel Research.

Company Background

Tech Mahindra was founded in 1986 as a joint venture between Mahindra Group

and British Telecom (BT) to service the latter. Later on, the company started

servicing other external clients as well (solely in the telecom industry). In June

2009, Tech Mahindra acquired a 42.7% stake in erstwhile Satyam Computers

(now Mahindra Satyam) and now the latter is entirely merged with the company.

The company has recently acquired the companies - LCC and Softgen. These two

acquisitions have been consolidated in 4QFY2015. LCC is one of the world’s

largest independent global providers of network engineering services to the

telecommunications industry. LCC is estimated to have annual revenues of more

than US$400mn (CY2014), with workforce of over 5,700 network professionals

across five continents and more than 50 countries.

August 2, 2017

Tech Mahindra | 1QFY2018 Result Update

Profit and loss statement (Consolidated, Indian GAAP)

Y/E March (` cr)

FY2015

FY2016

FY2017

FY2018E

FY2019E

Net sales

22,621

26,494

29,141

31,015

33,496

Cost of revenues

15,920

18,323

20,566

21,400

23,112

Gross profit

6,701

8,172

8,575

9,615

10,384

% of net sales

29.6

30.8

29.4

31.0

SG&A expenses

2,549

3,853

4,390

4,962

5,359

% of net sales

11.3

14.5

15.1

16.0

EBITDA

4,153

4,318

4,184

4,652

5,024

% of net sales

18.4

16.3

14.4

15.0

Depreciation and amortization

611

762

978

1054

1139

% of net sales

2.7

2.9

3.4

EBIT

3,541

3,556

3,206

3,598

3,886

% of net sales

15.7

13.4

11.0

11.6

Interest expense

129

Other inc., net of forex gain/(loss)

106

557

778

Profit before tax

3,618

4,017

3,855

4,247

4,535

Provision for tax

960

860

1,002

1,104

1,179

% of PBT

26.5

21.4

26.0

PAT

2,659

3,157

2,853

3,143

3,356

Exceptional item

Minority interest

Reported PAT

2,628

3,118

2,813

3,102

3,315

Adjusted PAT

2,628

3,118

2,813

3,102

3,315

Fully diluted EPS (`)

30.2

35.8

32.3

35.6

38.1

August 2, 2017

Tech Mahindra | 1QFY2018 Result Update

Balance sheet (Consolidated, Indian GAAP)

Y/E March (` cr)

FY2015

FY2016

FY2017

FY2018E

FY2019E

Equity capital

480

436

439

Preference capital

Share premium

Profit and loss

11,768

14,155

15,998

17,823

19,861

Other reserves

Net worth

12,249

14,591

16,438

18,261

20,300

Secured loans

621

1,002

1,219

Unsecured loans

Total debt

675

1,002

1,219

Other long term liability

376

147

537

Long-term provisions

414

531

620

Minority interest

160

193

464

504

545

Amount pending investigation

895

1,230

Total capital employed

14,768

17,695

20,508

22,372

24,451

Gross block

7,811

7,973

11,677

12,677

13,677

Accumulated dep.

(3,477)

(4,239)

(5,217)

(6,272)

(7,410)

Net block

4,334

4,364

6,460

6,406

6,267

Capital WIP

266

629

373

Total fixed assets

4,601

4,993

6,833

6,778

6,640

Investments

2,103

1,243

2,396

4,483

6,736

Long term loans and adv.

1,306

1,895

2,435

2,696

3,117

Interest in TML benefit trust

Deferred tax asset, net

390

532

267

Other non-current assets

Inventories

Sundry debtors

5,206

5,770

5,338

7,980

7,981

Cash and cash equv.

2,405

4,018

3,219

3,500

4,000

Loans and advances

3,813

4,032

5,518

2,999

3,000

Current investments

Unbilled revenue

Sundry creditors

(1,654)

(2,276)

(2,312)

(2,658)

(3,057)

Other liabilities

(1,627)

(2,200)

(2,860)

(3,289)

(3,782)

Provision

(1,799)

(355)

(387)

(445)

(512)

Working capital

6,368

9,031

8,577

8,148

7,691

Total capital deployed

14,768

17,695

20,508

22,372

24,451

August 2, 2017

Tech Mahindra | 1QFY2018 Result Update

Cash flow statement (Consolidated, Indian GAAP)

Y/E March (` cr)

FY2015

FY2016

FY2017

FY2018E FY2019E

Pre tax profit from operations

2,659

3,157

2,853

3,143

3,356

Depreciation

611

762

978

1,054

1,139

Exp. (deffered)/written off/others

Pre tax cash from operations

3,270

3,919

3,831

4,197

4,494

Other income/prior period ad

106

557

778

Net cash from operations

3,376

4,475

4,609

4,975

5,272

Tax

(960)

(860)

(1,002)

(1,104)

(1,179)

Cash profits

2,417

3,615

3,607

3,871

4,093

(Inc)/dec in

Sundry Debtors

(857)

(565)

433

(2,642)

(1)

Inventories

(15)

(16)

(21)

Loans and advances

(1,197)

(219)

(1,485)

2,519

(1)

Sundry creditors

105

621

347

399

Others

212

573

660

429

493

Net trade working capital

(1,752)

394

(377)

652

890

Cashflow from operating activities

665

4,010

3,230

4,523

4,983

(Inc)/dec in fixed assets

(1,740)

(393)

(1,840)

139

(Inc)/dec in investments

(2,067)

860

(1,153)

(2,087)

(2,253)

(Inc)/dec in other non current assets

(0)

Cashflow from investing activities

(3,791)

467

(2,992)

(2,033)

(2,114)

Inc/(dec) in debt

(311)

(328)

(217)

Inc/(dec) in deferred revenue

Inc/(dec) in equity/premium

Inc/(dec) in minority interest

(16)

(33)

(271)

(40)

Dividends

(611)

(1,223)

(917)

(1,278)

(1,277)

Others

1,713

(1,281)

369

(891)

(1,054)

Cashflow from financing activities

775

(2,864)

(1,037)

(2,209)

(2,369)

Cash generated/(utilised)

(2,351)

1,613

(800)

281

500

Cash at start of the year

4,756

2,405

4,018

3,219

3,500

Cash at end of the year

2405

4018

3219

3500

4000

August 2, 2017

Tech Mahindra | 1QFY2018 Result Update

Key Ratios

Y/E March

FY2015

FY2016

FY2017

FY2018E

FY2019E

Valuation ratio (x)

P/E (on FDEPS)

12.8

10.8

11.9

10.8

10.1

P/CEPS

10.4

8.6

8.9

8.1

7.5

P/BVPS

2.7

2.3

2.0

1.8

1.7

Dividend yield (%)

1.3

3.1

3.4

EV/Sales

1.6

1.3

1.2

1.1

1.0

EV/EBITDA

8.6

8.0

8.5

7.6

6.9

EV/Total assets

7.8

6.9

5.2

Per share data (`)

EPS

30.2

35.8

32.3

35.6

38.1

Cash EPS

37.2

44.5

43.5

47.7

51.1

Dividend

5.0

12.0

13.0

Book value

140.6

167.5

188.7

209.6

233.0

Dupont analysis

Tax retention ratio (PAT/PBT)

0.7

0.8

0.7

Cost of debt (PBT/EBIT)

1.0

1.1

1.2

EBIT margin (EBIT/Sales)

0.2

0.1

Asset turnover ratio (Sales/Assets)

4.9

5.3

4.3

4.6

5.0

Leverage ratio (Assets/Equity)

0.4

0.3

0.4

0.3

Operating ROE (%)

21.5

21.4

17.1

17.0

16.3

Return ratios (%)

RoCE (pre-tax)

24.0

20.1

15.6

16.1

15.9

Angel RoIC

29.3

27.3

19.0

19.4

RoE

21.5

21.4

17.1

17.0

16.3

Turnover ratios( x)

Asset turnover (fixed assets)

4.9

5.3

4.3

4.6

5.0

Receivables days

Payable days

August 2, 2017

Tech Mahindra | 1QFY2018 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,

Bombay Stock Exchange Limited and Metropolitan Stock Exchange Limited. It is also registered as a Depository Participant with CDSL

and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is a

registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number

INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing

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Disclosure of Interest Statement

Tech Mahindra

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

August 2, 2017