Tech Mahindra reported a healthy dollar revenue growth of 5.5% quarter-on-quarter (q-o-q) and strong rupee revenue growth of 9.3% aided by rupee depreciation.
The non-BT (non-British Telecom) revenues grew by robust 15.5% q-o-q in rupee terms while the BT account grew by 5.9% q-o-q.
During the quarter, Tech Mahindra won a five-year $700mn deal from BT involving transformation of systems and processes.
Gross margin improved substantially by 310bps to 38.9% despite the annual salary hikes (offshore: 11-12% and onsite: 3%) aided by sequentially lower transition cost (on the BTGS deal), rupee depreciation, offshore shift and higher utilization.
We upgrade Tech Mahindra to BUY with a one-year price target of Rs966 representing an upside of 42% from current levels. We believe that the company is the best play in the software sector with robust revenue visibility and strong earnings CAGR over FY08-10.
Company’s strategy of efficiently mining client relationship through domain and service expertise and entering into long-term transformational engagements has lent higher certainty to its future revenues and earnings. At ~7.4x FY10 P/E, the stock is undervalued.