2QFY2018 Result Update | IT

November 16, 2017

Tech Mahindra

ACCUMLATE

CMP

`495

Performance Highlights

Target Price

`526

(` cr)

2QFY18

1QFY18

% chg (qoq)

2QFY17

% chg (yoy)

Investment Period

12 Months

Net revenue

7,606

7,336

3.7

7,167

6.1

EBITDA

1,106

935

18.3

1,069

3.4

Stock Info

EBITDA margin (%)

14.5

12.7

176bp

14.9

(42)bps

Sector

Adj. PAT

839

792

6.0

643

30.4

Market Cap (` cr)

48,355

Source: Company, Angel Research;

Net Debt (` cr)

(6,370)

Tech Mahindra posted in-line results for 2QFY2018 on all fronts except net profit.

Beta

0.7

In Rupee terms, revenues came in at `7,606cr v/s. `7,582cr expected, up 3.7%

52 Week High / Low

515/358

qoq. On the operating front, the utilization levels during the quarter came in at

Avg. Daily Volume

237,207

81% v/s. 77% in 1QFY2018, which along with volume also aided the margins to

Face Value (`)

come in higher. On the operating front, the EBITDA margin, came in at 14.5%

BSE Sensex

32,760

(14.0% expected) v/s.

12.7% in 1QFY2018, a qoq expansion of

50bps.

Nifty

10,118

Consequently, PAT came in at `839cr v/s. `886cr expected, a growth of 6.0% qoq.

Reuters Code

TEML.BO

We maintain our Accumulate rating, with a Target Price of `526.

Bloomberg Code

TECHM@IN

Result highlights: The sales came in at US$1,179mn (US$1,172mn expected) v/s.

US$1,138mn in 1QFY2018, a qoq growth of 3.0%. In Rupee terms, sales came in

at `7,606cr (`7,582cr expected) v/s. `7,336cr in 1QFY2018, up 3.7% qoq. The sales

Shareholding Pattern (%)

growth during the quarter was driven by USA, which constituted 45.3% of sales

Promoters

36.1

in 2QFY2018 v/s. 46.8% in 1QFY2018, while ROW dipped to 24.7% of sales in

MF / Banks / Indian Fls

14.9

2QFY2018 v/s. 23.4% of sales in 1QFY2018. On operating front, the EBIT margins

FII / NRIs / OCBs

38.4

came in at 11.0% (10.7% expected) v/s. 9.4% in 1QFY2018, a qoq expansion of

Indian Public / Others

10.5

167bps, mainly on the back of base effect. Consequently, the PAT came in at

`839cr (`853cr expected) v/s. `792cr in 1QFY2018, a qoq growth of 6.0%.

Outlook and valuation: We expect a CAGR of 8.0% and 6.4% in USD and INR

Abs.(%)

3m 1yr

3yr

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

Sensex

3.1

20.6

16.3

CAGR of 7.8% over FY2017-19E. We maintain our Accumulate rating on the

Tech Mahindra

18.4

(24.2)

(23.7)

stock with a Target Price of `526.

Key financials (Consolidated, Indian GAAP)

Y/E March (` cr)

FY2016

FY2017

FY2018E

FY2019E

3-year price chart

Net sales

26,494

29,141

30,545

32,988

% chg

17.1

10.0

4.8

8.0

Net profit

3,118

2,813

3,062

3,272

% chg

18.7

(9.8)

8.9

6.9

EBITDA margin (%)

16.3

14.4

15.0

EPS (`)

35.8

32.3

35.2

37.6

P/E (x)

13.8

15.3

14.1

13.2

P/BV (x)

3.0

2.6

2.4

2.1

RoE (%)

21.4

17.1

16.8

16.2

RoCE (%)

20.1

15.6

15.9

15.7

Source: Company, Angel Research

1.7

1.6

1.5

1.4

EV/Sales (x)

Sarabjit kour Nangra

EV/EBITDA (x)

10.5

11.1

10.1

9.2

+91 22 3935 7800 Ext: 6806

Source: Company, Angel Research; Note: CMP as of November 15, 2017

[email protected]

Please refer to important disclosures at the end of this report

Tech Mahindra | 2QFY2018 Result Update

Exhibit 1: 2QFY2018 performance (Consolidated, Indian GAAP)

(` cr)

2QFY18

1QFY18

% chg (qoq)

2QFY17

% chg (yoy)

1HFY18

1HFY17

% chg (yoy)

Net revenue

7,606

7,336

3.7

7,167

6.1

14,942

14,088

6.1

Cost of revenue

5,142

5,282

(2.6)

4,972

3.4

10,424

9,852

5.8

Gross profit

2,464

2,054

20.0

2,195

12.3

4,519

4,236

6.7

SG&A expense

1,358

1,120

21.3

1,126

20.6

2,478

2,137

16.0

EBITDA

1,106

935

18.3

1,069

3.4

2,041

2,099

(2.8)

Dep. and amortization

265

247

7.5

245

8.3

512

447

14.6

EBIT

841

688

22.2

824

2.0

1,528

1,652

(7.5)

Interest

4.4

10.4

22.0

Other income

322

411

(21.5)

139

131.8

733

385

90.4

PBT

1,124

1,062

5.9

928

21.1

2,186

1,975

10.7

Income taxes

285

270

5.5

286

(0.4)

555

533

4.0

PAT

839

792

6.0

643

30.5

1,631

1,442

13.1

Minority interest

(2)

PAT after minority interest

839

792

6.0

643

30.4

1,631

1,440

13.3

Profit from associates

Exceptional item

Reported PAT

839

792

6.0

643

30.4

1,631

1,440

13.3

Adj. PAT

839

792

6.0

643

30.4

1,631

1,440

13.3

Diluted EPS

8.7

8.2

6.0

6.7

30.4

17.0

15.0

13.3

Gross margin (%)

32.4

28.0

439bp

30.6

177bps

30.2

30.1

17bp

EBITDA margin (%)

14.5

12.7

176bp

14.9

(42)bps

13.7

14.9

(124)bp

EBIT margin (%)

11.0

9.4

167bp

11.5

(45)bps

10.2

11.7

(150)bp

PAT margin (%)

11.0

10.9

15bp

9.0

206bps

10.9

10.2

69bp

Source: Company, Angel Research

Exhibit 2: 2QFY2018 - Actual Vs Angel estimates

(` cr)

Actual

Estimate

% Var

Net revenue

7,606

7,560

0.6

EBITDA margin (%)

14.5

PAT

839

853

(1.6)

Source: Company, Angel Research

Revenue growth led by USA

For 2QFY2018, Tech Mahindra posted good set of numbers. The sales came in at

US$1,179mn (US$1,172mn expected) v/s. US$1,138mn in 1QFY2018, a qoq growth

of 3.6%. In Rupee terms, the sales came in at `7,606cr (`7,560cr expected) v/s.

`7,167cr in 1QFY2018, a qoq growth of 3.7%. On Constant Currency (CC) terms,

the company posted a 2.3% qoq growth during the quarter.

In terms of geography, USA constituted 45.3% of sales, a qoq growth of 0.3%,

while ROW was the key growth driver constituting 24.7% of sales, posting a qoq

growth of 9.4%. Europe, on the other hand posted a qoq growth of 4.3%.

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

qoq growth of 2.0%. BFSI was the main driver, which lead the segment,

contributing around 14.1% of sales, posting a qoq growth of 1.5%. The key

domain Retail, Transport & Logistics, posted a qoq growth of 9.7%. Also, the

Technology, Media & Entertainment, posted a qoq growth of 1.9%.

November 16, 2017

Tech Mahindra | 2QFY2018 Result Update

Hiring and client metrics

During the quarter, the company reported a net addition of 1,245 employees,

taking its overall headcount to 1,17,225. The BPO headcount currently stands at

35,287 and was the only division to witness additions. Attrition (on LTM basis) was

at 16%.

Exhibit 6: Employee metrics

Particulars

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

Software professionals

78,404

80,858

82,403

78,996

75,587

BPO professionals

27,669

29,372

28,414

30,322

35,287

Sales & support

6,813

6,865

6,876

6,662

6,351

Total employees

1,12,886

1,17,095

1,17,693

1,15,980

1,17,225

Attritions (%)

Source: Company, Angel Research

Exhibit 7: Trend in utilization rate

Source: Company, Angel Research

On the client additions front, the company added 21 clients, with major of the

client additions in the range of US$1-5mn.

Also, in terms of the growth drivers, the main driver has been client additions

during the quarter, with repeat business contributing 95% v/s. 97% in 1QFY2018.

November 16, 2017

Tech Mahindra | 2QFY2018 Result Update

Exhibit 8: Client metrics

Particulars

2QFY17

3QFY17

4QFY17

1QFY18

2QFY18

Total active clients

818

837

843

864

885

US$1mn-5mn

197

228

220

238

243

US$5mn-10mn

US$10mn-20mn

US$20mn-50mn

US$50mn+

Source: Company, Angel Research

Operating margin expands

On the operating front, the utilization levels during the quarter came in at 81%

v/s. 77% in 1QFY2018, which along with volumes also aided the margins to come

in higher. On the operating front, the EBITDA margin came in at 14.5% v/s. 14.0%

expected, and 12.7% in 1QFY2018, a qoq expansion of 180bps.

Exhibit 9: Margin trend (%)

Source: Company, Angel Research

Investment arguments

Growth prospects decent: The Management is more optimistic about its

performance in the 2HFY2018. 2HFY2018, is strong for company because of

seasonality in the Communication business. On the margin front, improvement,

on the back of synergies and productivity gains has started reflecting from

2QFY2018. Company expects continued margin recovery going forward. We

expect a CAGR of 8.0% and 6.4% 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

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

November 16, 2017

Tech Mahindra | 2QFY2018 Result Update

with an estimated annual revenue 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 6.4% 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 an Accumulate rating on the stock.

Exhibit 10: Key assumptions

FY2018E

FY2019E

Revenue growth (US$)

8.0

USD-INR rate (realized)

65.0

Revenue growth (`)

4.8

8.0

EBITDA margin (%)

15.0

Tax rate (%)

26.0

EPS growth (%)

8.9

6.9

Source: Company, Angel Research

Exhibit 11: One-year forward PE (x)

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

November 16, 2017

Tech Mahindra | 2QFY2018 Result Update

Exhibit 12: Recommendation summary

Company

Reco

CMP Tgt Price Upside

FY2019E FY2019E

FY2017-19E

FY2019E FY2019E

(`)

(%) EBITDA (%)

P/E (x)

EPS CAGR (%) EV/Sales (x)

RoE (%)

HCL Tech

Buy

848

1,014

19.5

22.1

12.5

6.2

1.8

20.6

Infosys

Buy

952

1,120

17.7

26.0

14.4

2.7

2.2

18.7

TCS

Reduce

2,703

2,442

(9.8)

26.1

18.8

3.4

3.5

27.8

Tech Mahindra

Accumulate

495

526

6.2

15.0

13.2

8.6

1.2

16.2

Wipro

Neutral

296

22.3

15.2

5.5

1.7

13.6

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.

November 16, 2017

Tech Mahindra | 2QFY2018 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

30,545

32,988

Cost of revenues

15,920

18,323

20,566

21,076

22,762

Gross profit

6,701

8,172

8,575

9,469

10,226

% of net sales

29.6

30.8

29.4

31.0

SG&A expenses

2,549

3,853

4,390

4,887

5,278

% of net sales

11.3

14.5

15.1

16.0

EBITDA

4,153

4,318

4,184

4,582

4,948

% of net sales

18.4

16.3

14.4

15.0

Depreciation and amortization

611

762

978

1039

1122

% of net sales

2.7

2.9

3.4

EBIT

3,541

3,556

3,206

3,543

3,827

% 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

4,192

4,476

Provision for tax

960

860

1,002

1,090

1,164

% of PBT

26.5

21.4

26.0

PAT

2,659

3,157

2,853

3,102

3,312

Exceptional item

Minority interest

Reported PAT

2,628

3,118

2,813

3,062

3,272

Adjusted PAT

2,628

3,118

2,813

3,062

3,272

Fully diluted EPS (`)

30.2

35.8

32.3

35.2

37.6

November 16, 2017

Tech Mahindra | 2QFY2018 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

17,782

19,778

Other reserves

Net worth

12,249

14,591

16,438

18,221

20,217

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

22,332

24,368

Gross block

7,811

7,973

11,677

12,677

13,677

Accumulated dep.

(3,477)

(4,239)

(5,217)

(6,256)

(7,377)

Net block

4,334

4,364

6,460

6,422

6,300

Capital WIP

266

629

373

Total fixed assets

4,601

4,993

6,833

6,794

6,673

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

3,444

3,884

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

8,091

7,575

Total capital deployed

14,768

17,695

20,508

22,332

24,368

November 16, 2017

Tech Mahindra | 2QFY2018 Result Update

Cash flow statement (Consolidated, Indian GAAP)

Y/E March (` cr)

FY2015

FY2016

FY2017

FY2018E FY2019E

Pretax profit from operations

2,659

3,157

2,853

3,102

3,312

Depreciation

611

762

978

1,039

1,122

Exp. (deffered)/written off/others

Pre tax cash from operations

3,270

3,919

3,831

4,141

4,434

Other income/prior period ad

106

557

778

Net cash from operations

3,376

4,475

4,609

4,918

5,211

Tax

(960)

(860)

(1,002)

(1,090)

(1,164)

Cash profits

2,417

3,615

3,607

3,828

4,048

(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

4,481

4,938

(Inc)/dec in fixed assets

(1,740)

(393)

(1,840)

122

(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)

(2,049)

(2,131)

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)

(1,276)

Others

1,714

(1,281)

369

(889)

(1,051)

Cashflow from financing activities

775

(2,864)

(1,037)

(2,207)

(2,366)

Cash generated/(utilised)

(2,351)

1,613

(800)

225

440

Cash at start of the year

4,756

2,405

4,018

3,219

3,444

Cash at end of the year

2405

4018

3219

3444

3884

November 16, 2017

Tech Mahindra | 2QFY2018 Result Update

Key Ratios

Y/E March

FY2015

FY2016

FY2017

FY2018E

FY2019E

Valuation ratio (x)

P/E (on FDEPS)

16.4

13.8

15.3

14.1

13.2

P/CEPS

13.3

11.1

11.4

10.5

9.8

P/BVPS

3.5

3.0

2.6

2.4

2.1

Dividend yield (%)

1.0

2.4

EV/Sales

2.1

1.7

1.6

1.5

1.4

EV/EBITDA

11.2

10.5

11.1

10.1

9.2

EV/Total assets

10.1

9.1

6.8

Per share data (`)

EPS

30.2

35.8

32.3

35.2

37.6

Cash EPS

37.2

44.5

43.5

47.1

50.4

Dividend

5.0

12.0

Book value

140.6

167.5

188.7

209.2

232.1

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

4.5

4.9

Leverage ratio (Assets/Equity)

0.4

0.3

0.4

0.3

Operating ROE (%)

21.5

21.4

17.1

16.8

16.2

Return ratios (%)

RoCE (pre-tax)

24.0

20.1

15.6

15.9

15.7

Angel RoIC

29.3

27.3

19.0

19.1

19.0

RoE

21.5

21.4

17.1

16.8

16.2

Turnover ratios( x)

Asset turnover (fixed assets)

4.9

5.3

4.3

4.5

4.9

Receivables days

Payable days

November 16, 2017

Tech Mahindra | 2QFY2018 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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offering of securities of the company covered by Analyst during the past twelve months.

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment

decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should

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the merits and risks of such an investment.

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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)

November 16, 2017