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Unformatted text preview: ultiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses
the year end close Deutsche Bank AG/Hong Kong Page 23 7 January 2014
Software & Services
Indian IT Services Investment thesis
We expect Tech Mahindra's planned acquisition of a controlling stake in
Satyam Computers to enable the company to spread its risks. Although the
company has leveraged its balance sheet, Satyam's diversified service and
client base gives Tech Mahindra the ideal foil to diversify its risks away from
the telecom vertical and the arguably volatile revenues from its top client, BT.
Concerns about reduction in revenues from BT are in the price, in our opinion.
Our Buy is based on the upside potential to our target price. Valuation
We expect the combined entity (including Satyam) to deliver a USD revenue
CAGR of 18% over FY14–16E and an earnings CAGR of 13.9% over the same
period. Our FY15E EPS for the merged entity is INR154.3. With the availability
of merged entity financials, we have discontinued the practice of valuing
TechM on a sum-of-the-parts basis; we now value it on a one-year forward P/E
basis (in line with the valuation methodology adopted for the rest of the stocks
in the sector). Our target price is based on a P/E of 14x FY15E (vs. 12.5x
FY14E/12) earnings (PEG of 1). Risks
Key risks for Tech Mahindra are: 1) high vertical and client concentration, with
more than 90% of revenues from communications service providers and within
that, c26% of revenues from a single client, BT; 2) currency fluctuation risk,
with the bulk of earnings coming from exports (19% GBP denominated); 3) a
potential global slowdown, which could lead to project deferrals or reduced
growth rates; and 4) indirect liabilities from potential suits filed against Satyam. Page 24 Deutsche Bank AG/Hong Kong 7 January 2014
Software & Services
Indian IT Services
Fiscal year end 31-Mar Model updated:06 January 2014
Running the numbers 2011 2012 2013 2014E 2015E 2...
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- Spring '14