Tech Mahindra’s revenue advanced 9.3% sequentially to Rs11.1 billion due to a 23.9% surge in the revenue contribution from the US. EBITDA margins also improved 393 bps due to a dip in transition costs.
The company has deals aggregating around $2 billion from BT. Among these, the $1 billion BTGS deal is gradually ramping up and is coming out of its transition phase. Further, revenue contribution from the US is seeing a strong traction and has increased by 23.9% q-o-q to Rs2.45 billion.
Moreover, Tech Mahindra will add around 5,500 gross employees during FY09, promising a high volume growth.
Going forward, we believe EBITDA margin will remain volatile during FY09 due to the erratic nature of the transition costs. Although utilization levels may improve, a limited scope for further SG&A leverage will restrict EBITDA margin for the full year to around 23%.
Meanwhile, we remain cautious on the margin outlook for the 2-3 year period in the absence of details on the new deals won by paying an upfront amount as they may have lower operating margins than the overall margins.
The stock trades at a forward P/E of 11.1x for FY09, which is at a discount to the average industry multiple of 13.9x. Moreover, DCF valuation gives a fair value estimate of Rs963, which is 25% more than the current market price. We maintain BUY on the counter.