{LONGTERMINVESTORS} RSec - Tech Mahindra – 3QFY16 Result Update - Muted communication division & TM&E ahead

Tech Mahindra – 3QFY16 Result Update - Muted communication division & TM&E ahead

Tech Mahindra (TECHM) posted numbers below our estimates on lower revenue as well as lower growth in margin. While lumpy growth in enterprise division supported 1.2% cc revenue growth of TECHM, decline in communications division had a negative impact due to project ramp-down, furlough seasonality as well as extended spending decision-cycle by large communications accounts. With volatility in communication division (large accounts as well as mid-sized accounts) and TM&E vertical ahead, margin headwinds of wage hike in 1Q, we expect benign earnings growth ahead (7% CAGR over FY15-18E) and downgrade our recommendation to HOLD (BUY earlier) with Target Price of Rs520. 

Communication division results in soft quarter; outlook muted          

TECHM's revenue stood at US$1,015mn, 0.4% qoq on 1.2% cc growth supported by enterprise growth of 3.8% qoq mitigated by communications division decline of 2.7% qoq (communications division/enterprise division cc growth at 3.4%/-1.8% qoq respectively). With ongoing go-to-market integration with LCC, weak seasonality of Comviva/LCC in 1Q/4Q respectively, elongated decision cycle of large accounts; the communications vertical is not expected to revive in the near-to-medium term, thereby impacting overall growth profile of the company. Top-5 accounts (includes 3 in communications division) as well as top11-20 accounts were weak with sequential decline of 12.2% and 7.4% respectively. Revenue growth in 3Q was onsite-led with onsite revenue growth at 2% qoq while offshore revenue declined 2.3% qoq.

Slight improvement in operating margin

EBITDA margin improved sequentially to 16.9%, +30bp qoq supported by utilization improvement to 80% in 3Q. Margin headwind of onsite-shift was mitigated by higher utilization, lower SG&A and currency depreciation. PAT stood at Rs7,592mn (RSec est. Rs7,678mn). While enterprise continued to grow at a healthy rate despite growth asymmetry within its segments, communications (51.3% of revenue) & TM&E segment (7.4% of revenue) are expected to remain volatile ahead.

Outlook and Valuation

We downgrade TECHM based on growth volatility around telecom and portions within the enterprise segment; lower FY17E/18E earnings growth by 9%/5% respectively. We expect TECHM's US$ revenue/EPS to grow at 9%/7% CAGR over FY15-18E. We lower our recommendation to HOLD (BUY earlier) with downgraded Target Price of Rs520 (Rs590 earlier).

 

 

 

For further details refer the attached report.

 

 

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