CMP Rs1,114, SELL
Target price Rs1,062, Upside (4.7)%
We met the management of Tech Mahindra to get an update on recent business developments and growth outlook. The outlook on the topline, which has been a major cause of concern off late, remains hazy in the near term with the Top 2 clients (BT and AT&T - ~76% of revenues) undergoing major restructuring. We believe the relative positives about Tech Mahindra like low US exposure, low dollar exposure, no BFSI/sub-prime exposure and niche positioning have been outweighed by the increasing concerns about the high vertical and client concentration in the light of recent happenings in the above key accounts.
As an acknowledgement of that fact, the stock has corrected sharply than peers. It is down 23% since start of FY08 and 45% since its 52-week high in January 2007. Valuations have declined drastically from 23-27x 1-year forward P/E to 13-16x with moderation in growth expectations from 40-50% to 20-25% over the medium-term (1-2 years). Based on our FY09 EPS estimate of Rs75.9 and FY07-10 earnings CAGR forecast of 19%, we arrive at a March 2008 target price of Rs1,062 for Tech Mahindra by assigning a P/E multiple of 14x. The assigned valuation is at 15% discount to Infosys and TCS and at par with Satyam. With a likely 4-5% downside in the near term, we believe that the stock is a short-term SELL. Progress on the US$1bn BTGS deal would be a key to the stock price movement in the medium term.
Click below for the key takeaways of our interaction with the company.
http://www.indiainfoline.com/adserver/InverstorReport_TechM071207.asp
Warm Regards,
India Infoline Research Team
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