>Tech Mahindra - BUY (INDIABULLS)

Tech Mahindra Ltd. - BUY

Attractive valuation despite near-term headwinds
Tech Mahindra (TM) reported a disappointing performance for the quarter ended December 2008 as revenues went down 2.8% qoq to Rs. 11.3 bn, owing to a 3% decline in the sales volume. In USD terms, revenues declined substantially by 14% qoq due to a sharp depreciation in the GBP vis-à-vis the USD. The EBITDA margin improved slightly by 10 bps qoq to 28.1% after adjusting for a one-time tax reversal of Rs. 673 mn in the last quarter. Although we have cut our target price to Rs. 309 because of the deteriorating demand outlook and high revenue concentration, we maintain a Buy rating on the stock. This is attributed largely to TM’s large order book and strong balance sheet. Besides, we believe that the current price correction to the stock is overdone.

Strong revenue visibility: TM maintains a healthy order book of USD 2.5 bn over the next 3–4 years, including approximately USD 2 bn of deals from British Telecom (BT). This provides strong revenue visibility for the near-tomedium term. However, we remain concerned about the possible delays in the ramp-ups from BT due to the deteriorating performance of its various operating segments. Moreover, the new deals inflow is likely to remain poor, adversely affecting the volume growth.

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