Tech Mahindra
In line results; Cut rating one notch to HOLD
HOLD
CMP: Rs 941 Target Price: Rs 915
TechM reports revenues of US$ 237 mn(+3.9% QoQ) marginally below our estimates of US$ 240 mn. Operating margins expanded by ~40 bps sequentially to 25.6% (V/s our expectations of ~110 bps increase) driven by lower revenues and impact of (1) wage increments (implemented with retrospective effect from Q2FY10 start and (2) lower pricing from top client.
Net profits at Rs 1695 mn (+29% QoQ) met estimates driven by higher than expected other income.
Revenues from top client were flat in reported currency (however declined by ~5% QoQ, marking the 5th successive quarter of revenue decline). Co indicated that it expected revenues/volumes from top client to stop decline going forward. Growth outside of non top client was credible for the 2nd quarter in a row.
Up standalone EPS estimates by ~11%/18% for FY10/11 to Rs 49.1/56 (V/s Rs 44.3/Rs 47.6 earlier) driven by increase in revenue estimates and savings on interest costs (note ~9% EPS revision for FY11 driven by savings on interest costs)
Cut rating one notch from ACCUMULATE to HOLD with a revised target price of Rs 915 as we believe valuations are full with Tech M trading at ~15xadjusted FY10E EPS/12.6xadjusted FY11E EPS of Rs 41.1/Rs 48 respectively. Key risk to our call emanate from (1) sale of L&T's 7% stake in Satyam at a price higher than today's market price and (2) INR depreciation.
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