Around 70% of Tech Mahindra’s revenue is billed in pounds, we expect a hit to its US dollar revenue, sequentially as the pound has appreciated against the dollar. Moreover, the slowdown in BT revenues continues in 3QFY09 as well.
IT budgets of telecom companies may be 5-10% lower in 2009. However, mega projects are outside budgets and would continue to get financial support.
The core BT business (excluding the BTGS deal) has also slipped. The management sees pressure ahead as well.
Other discretionary spends by telcos, contributing ~30% of the company’s revenue, could potentially come under stress in such difficult times: fresh activities from current clients have taken a back seat.
EPS for FY09 has been decreased by 0.7% to Rs90; while those of FY10 and FY11 have been revised upwards by 3.5% and 3.2%, to Rs86.4 and Rs72.4, respectively.
A worst-case scenario and current valuations indicate that the worst has been priced in. Any further negative impact of 3QFY09 results would present a good opportunity. We maintain a BUY, with a target of Rs430 (implied PE of 5xFY10e earnings).