>TECH MAHINDRA LIMITED (EMKAY)

■ Q1FY10 Highlights
Tech Mahindra reported US$ revenues of US$ 228 mn (+7.7% QoQ, -16.3% YoY) V/s our expectations of US$ 223 mn. Operating profits at Rs 2,805 mn was marginally below estimates as company reported operating margins of 25.2% (V/s expectations of 25.8%, note operating margin decline on reporting basis is higher at ~ 200 bps declines as Q4FY09 involved one time provision write back of ~Rs 250 mn). Net profits at Rs 1,316 mn missed expectations (our estimate at Rs 1,658 mn) on account of other income losses of ~Rs 261 mn.

■ Top client woes continue; Expect more pressure ahead
Revenues from the top client were up 7.7% QoQ in US$ terms at US$ 118.4 mn however were down marginally in GBP mn at GBP 75.9 mn V/s GBP 77.5 mn during Q4FY09. We believe that revenues from core BT segment would continue to be under pressure as IT spending priorities continue to evolve driven by macro weakness. We are surprised by the co’s stance of not disclosing the revenue contribution from the BTGS and the ANDES deals (revenues from ANDES were to kick in from Q1FY10 onwards) and would have appreciated the disclosure of financial given the nature of deal structures for them (note that Tech M has made upfront payments for both of these contracts with significant investor and our attention focused on NPV’s of these contracts). Tech M management during the call noted that it was renegotiating the scope and nature of business under these contracts with BT and expected more clarity to emerge by end of Q2FY10.

■ Maintain ACCUMULATE with revised TP of Rs 742
We maintain ACCUMULATE on Tech Mahindra with a revised target price of Rs 752 based on 11x consolidated base case FY11 EPS estimates of Rs 67.1 (V/s Rs 550, based on 8x earlier). However we would not rule out near term correction in the stock given ~100%+ run up in the stock over the past 3 months as well as negative reaction to business prospects at the top client.

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