>TECH MAHINDRA LIMITED (ICICI DIRECT)

Paying heavy interest …

Tech Mahindra reported 5.9% increase in revenues for Q1FY10 at Rs1113.0 crore (2% growth in constant currency). EBITDA margins dropped 180 bps qoq to 25.2%. Profit at Rs131.6 crore declined 43% qoq. The huge fall in bottom line was due to increase in interest outgo on account of debt taken for the Satyam acquisition. Exceptional item of Rs8.5 crore in relation to the write down off investment made in Servista in Q2FY09 also impacted bottom line.

Highlight of the quarter
The highlight of the quarter was the greater than expected interest payment for the debt taken for the Satyam acquisition. The interest outgo for Q1FY10 was Rs57.1 crore (ICICIdirect estimate Rs55 crore) compared to Rs2.3 crore in Q4FY09. The company has an outstanding debt of Rs2380 crore on its books as on June, 2009. Forex loss of $12 million lead to other income loss of Rs26.1 crore (ICICIdirect estimate of other income was Rs10.9 crore) compared to Rs7.8 crore in Q4FY09 also dented the profitability of the company. During Q2FY09 the company had made an investment in a UK based SI, Servista, for which it had to take a write down of Rs8.5 crore.

Valuations
The company continues to see a decline in the traditional BT business which has been made up in Q1FY10 by the start of the Andes deal. The company expects pricing pressure from BT going ahead. Higher than expected interest expense and forex loss has made us revise down our FY10E EPS by 13%. We maintain our Hold rating on the stock with a price target of Rs720.

To see full report: TECH MAHINDRA