Tech Mahindra Limited

27 May 2011

Jaypee Research Desk

www.jaypeeindia.com www.jaypeeusa.com

Q4FY11 RESULT UPDATE

As on May 26, 2011. Market Cap. (` mn) 52 Week High/Low Book Value Face Value Codes BSE Code NSE Symbol Bloomberg Code Reuters Code 532755 TECHM TECHM IN TEML.BO 83125 `846/539 `236 `10

CMP: `660

Target: `700

NEUTRAL

Revival of non BT accounts show glimmers of hope

Tech Mahindra reported good quarter in Q4FY11, with revenue growing in line with peers. Management indicated that it expects revival in the telecom industry. Results were affected by net loss of Mahindra Satyam, which improved operating margins by 660 bp QoQ to 13.0% but had to shell out significant amount to settle lawsuits. We infer that worst might be past, but would like to wait for another quarter to see the stability and growth before changing our outlook from neutral to positive. Financial Snapshot: For Q4FY11, $ revenue stood at $278.5 mn (+3.6% QoQ, +7.7% YoY) {our expectation $275 mn}. ` revenue stood at `12,615 mn (+4.2% QoQ, +6.6% YoY) {our expectation `12,377 mn}. ` EBIT stood at `2,203.3 mn. EBIT margin declined by 30 bp to 17.5%. ` Net Income stood at `921 mn, which included loss due to Mahindra Satyam holding amounting to `1,144 mn. Excluding the loss, Net Income stood at `2,065 mn (+0.5% QoQ). EPS for the quarter was `7.39 (-64.2% QoQ, -59.4% YoY). For FY11, $ revenues stood at 1,126.6 mn (+15.4% YoY) {our expectation $1,123.2 mn}. ` revenue stood at `51,402 mn (+11.1% YoY) {our expectation `51,164.3 mn}. ` EBIT stood at `8,598.3. EBIT margin stood at 16.7%. ` Net Income stood at `6,293 mn (incl. loss due to Mahindra Satyam holding}. EPS for the year stood at `49.34 (-13% YoY). TSP business contributed 87%, TEM 5% and BPO 6%. The board recommended a dividend of `4.0/ share for FY11. Revival of top accounts: Though BT account declined by 3.6% QoQ, next 4 accounts grew by 7.3% QoQ and next 5 grew by 3.6%. Hiring pattern also suggests project flows. The company has already given 3,500 offers in various engineering campuses. In Q4, company won 2 big deals in Managed Services area, which is the next grown area for the company. The company is also pursuing emerging markets like India, Africa and Middle East to seek IT Services and BPO deals.

Shareholding Pattern Mar 2011 Promoters FII DII Others 71.7 2.9 15.1 10.3

Dec 2010 72.8 1.7 15.3 10.3

Sept 2010 72.8 1.7 15.1 10.3

140 120 100 80 60 40

Share Price Performance Chart

TechM

Nifty

Share Price Returns (%)

Absolute Relative 1M -10.7 -4.5 6M -4.8 2.9 12M -2.3 -13.2

Valuation: We value the core business at 8x FY12E EPS, and arrive at core business value of `502/share. We give 33% discount to Satyam holding (~42.7%) and get per share contribution of Satyam holding to arrive at the fair value of `700, which is similar to our earlier estimate. We maintain NEUTRAL on Tech Mahindra.
Financial Summary (` mn)

Vijay Gautam
[email protected]

Krupa B Shah
[email protected] Contact No: +91 22 43542019

$ Revenue ($mn) Revenue EBIT EBIT margin Net Income Net margin EPS (`)

Q4 FY11 Q3 FY11 Q4FY10 $ 278.5 $ 268.9 $ 258.6 12,615 12,111 11,833 2,203 2,150 2,389 17.5% 17.8% 20.2% 922 2,570 2,270 7.3% 21.2% 19.2% 7.39 20.65 18.60

QoQ 3.6% 4.2% 2.5% (29) -64.1% (1,391) -64.2%

YoY FY10 FY11 YoY 7.7% $ 976.6 $ 1,126.6 15.4% 6.6% 46,254 51,402 11.1% -7.8% 9,959 8,598 -13.7% (272) 21.5% 16.7% (480) -59.4% 7,003 7,438 6.2% 15% 14% (67) (1,188) -60.3% 60.89 60.80 -0.1%

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Tech Mahindra Limited

27 May 2011

Jaypee Research Desk

www.jaypeeindia.com www.jaypeeusa.com

INCOME ANALYSIS

Revenue trend in past 6 quarters

Topline growth has accelerated, while profitability sharply declined due to Mahindra Satyam loss. Profitability has declined even after excluding Satyams loss, suggesting that Tech Mahindra is compromising on billing rates to keep revenue ticking. This is highly probable especially for BT account
$285 $275 7.3% 1.9% $259 $251 -2.9% $269 $2655.4% 3.6% 1.6% $279 8% 6%

Revenue ($mn)

$255 $245 $235 $225

$254

2% 0% -2% -4%

Q3 FY10

Q4 FY10

Q1 FY11 Revenue

Q2 FY11

Q3 FY11

Q4 FY11

QoQ

Revenue and Net Profit in past 6 quarters

14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Q3 FY10 Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Revenue Net Profit Net margin 1,728 2,270 1,443 1,507 2,570 922 11,833 12,350 12,111 12,615 25% 20% 15% 10% 5% 0%

[Source: Company, Jaypee Research]

Operating margins have marginally declined since last quarter

Margins EBITDA margin EBIT margin

Q3 FY10 Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 23.6% 23.6% 18.8% 18.4% 20.6% 20.5% 20.9% 20.2% 15.6% 16.1% 17.8% 17.5%

[Source: Company, Jaypee Research]

Service offerings: Research & Advisory Execution Corporate Access & Events

11,337 11,873

Net margin

` mn

QoQ growth

$265

4%

Tech Mahindra Limited

27 May 2011

Jaypee Research Desk

www.jaypeeindia.com www.jaypeeusa.com

BT remains the largest account, but it is stagnant. AT&T, Motorola are other top accounts that have revived. Top 4 accounts after BT exhibit a volatile performance and Tech Mahindra must focus on stable revenue growth from them

$mn BT Next 4 accounts Next 5 accounts

Q3 FY10 $ 116.7 $ 73.6 $ 17.8

Q4 FY10 $ 119.0 $ 67.2 $ 23.3

Q1 FY11 $ 113.0 $ 72.8 $ 20.1

Q1 FY11 $ 114.9 $ 137.8 $ 23.0

Q3 FY11 $ 118.3 $ 75.3 $ 23.0

Q4 FY11 $ 114.2 $ 80.8 $ 24.2

Client BT Next 4 accounts Next 5 accounts

Q3 FY10 Q4 FY10 Q1 FY11 Q1 FY11 Q3 FY11 Q4 FY11 -1.3% 1.9% -5.0% 1.7% 3.0% -3.5% 24.5% -8.6% 8.3% 89.3% -45.4% 7.3% -16.5% 31.0% -13.7% 14.4% 5.3% 3.6%

Trends in BT revenues
$120 $119.0 $116.7 $114.9 $113.0 $114.2 -2% -4% -6% Q3 FY10 Q4 FY10 Q1 FY11 BT Rev. Q2 FY11 Q3 FY11 Q4 FY11

BT revenues ($mn)

BT revenues remain volatile

$118.3

4% 2% 0%

$118 $116 $114 $112 $110

QoQ

Trends in non-BT revenues

$180
Non BT revenues ($mn)

$164.3 $149.8 $137.1 $139.6 $138.1 $150.6

10% 8%
QoQ growth

..while non-BT revenues have kept growing, albeit at a slower rate

$160 $140 $120 $100 $80

6% 4% 2% 0% -2%

Q3 FY10 Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Non-BT Rev. QoQ

[Source: Company, Jaypee Research]

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QoQ growth

Tech Mahindra Limited

27 May 2011

Jaypee Research Desk

www.jaypeeindia.com www.jaypeeusa.com

TSP Revenue and EBITDA

TSP revenues (` mn)

10,500 10,000 9,500 9,000

10,258

10,190 9,896

36% 35% 34% 33% 32%

Q3 FY10 Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 TSP Revenue EBITDA margin

TEM Revenue and EBITDA

800 779 703 44%

TEM revenues (` mn)

700 650 600 550 500 579 584

684

36% 32% 583 28% 24% 20%

Q3 FY10 Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 TEM Revenue EBITDA margin

[Source: Company, Jaypee Research]

Service offerings: Research & Advisory Execution Corporate Access & Events

TEM EBITDA margin

TEM contributes 5% to revenues

750

40%

TSP EBITDA margin

TSP remains largest service line, while contributing 87% to revenues

11,000

10,691

38% 10,567 10,568 37%

Tech Mahindra Limited

27 May 2011

Jaypee Research Desk

www.jaypeeindia.com www.jaypeeusa.com

BPO Revenues and EBITDA

BPO Revenues (` mn)

while BPO revenues

contributes

6%

to

1,100 1,000 900 800 700 600 500 682 627 669 771 767

1,007

47% 46% 45% 44% 43% 42% 41% 40% 39% 38%

Q3 FY10 Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 BPO Revenue EBITDA margin

[Source: Company, Jaypee Research] EBITDA margins have shown uptrend across service lines. However, increased depreciation has resulted in EBIT margin falling marginally by 30 bp to 17.5%. CLIENT DETAILS
Client pyramid Active Clients $1-2 mn clients $2-5 mn clients $5-10 mn clients $10-15 mn clients $15-20 mn clients $20-25 mn clients $25-50 mn clients $50 mn+ clients Q3 FY10 110 19 12 9 1 3 1 2 2 Q4 FY10 113 15 15 7 3 3 1 2 2 Q1 FY11 117 16 16 7 5 2 2 2 2 Q2 FY11 124 13 18 7 6 1 2 2 3 Q3 FY11 126 14 19 5 7 2 1 2 3 Q4 FY11 128 18 16 6 7 1 3 1 3

[Source: Company, Jaypee Research] The company has 128 active clients by the end of FY11, out of which 3 were $50 mn clients. 55 client accounts are $1 mn+, while 73 customer accounts are sub-$1 mn in nature. The company must focus on increasing client penetration and achieve critical mass.

Service offerings: Research & Advisory Execution Corporate Access & Events

BPO EBITDA margin

Tech Mahindra Limited

27 May 2011

Jaypee Research Desk

www.jaypeeindia.com www.jaypeeusa.com

EMPLOYEE DETAILS The company had total of 38,333 employees, out of which 26,282 were software professionals, 11,011 BPO professional and 1,040 in sales & support. Utilization has been in range of 74% and net addition of employees significant in past two quarters, suggesting project flow, which is an encouraging sign.

IT Service net addition and utilization

2,500 2,161 2,206 1,306 73% 73% 69% Q3 FY10 Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 75% 76% 1,000 78% 76% 74% 74% 1,000 72% 70% 68% 66% 64% 62% (1,262) Software IT utilization 60%

Net S/W headcount addition

2,000 1,500 1,000 500 0 -500 -1,000 -1,500

[Source: Company, Jaypee Research] VALUATION

We value the core business at 8x FY12E EPS (which seems logical given modest growth in revenues and lower margins as compared to peers), and arrive at core business value of `502/share. We give 33% discount to Satyam holding (~42.7%) and get per share contribution of Satyam holding to arrive at the fair value of `700, which is similar to our existing estimate. We maintain NEUTRAL on Tech Mahindra.

Service offerings: Research & Advisory Execution Corporate Access & Events

Tech Mahindra Limited

27 May 2011

Jaypee Research Desk

www.jaypeeindia.com www.jaypeeusa.com

Consolidated Financials
Income Statement Y/E June (` mn) Revenue YoY Growth (%) Personnel Cost SG&A expenses EBITDA EBITDA margin Depreciation EBIT (Operating Income) EBIT (Operating) margin Interest Other Income PBT Income Taxes Effective tax rate (%) Minority Interest Extraordinary items Net income YoY Growth (%) Shares outstanding (mn) Diluted EPS (`) YoY growth (%) DPS Cashflow Y/E June (` mn) Net Profit Before Tax Direct Taxes Depreciation & Amortization Changes in working capital Other operating cash flow Cash flow from Operations Capital expenditure Investment in subsidiary (Inc.)/ Dec. in investments Other investing cash flow Cash flow from Investing Issue of equity Issue/ (repay) debt Dividends paid + div. tax Other financing cash flow Cash flow from Financing FY10 8,742 (1,620) 1,299 4,882 1,430 14,733 (4,062) (25,625) 3,919 61 (25,707) 51 13,700 (5,712) 8,039 FY11 8,774 (1,316) 1,188 (4,152) 1,345 5,839 (3,000) (7,500) 3,919 61 (6,520) (1,288) (951) (2,239) (2,920) 1,400 (1,520) FY12E 10,279 (2,313) 1,550 (37) 1,345 10,825 (2,000) (7,500) 3,919 61 (5,520) (1,580) (951) (2,531) 2,774 (1,520) 1,254 FY13E 10,618 (2,389) 1,640 (77) 1,345 11,137 (2,000) (5,000) 3,919 61 (3,020) (1,646) (951) (2,597) 5,521 1,254 6,775 FY10 46,254 3.6% 20,584 14,373 11,297 24.4% 1,339 9,959 21.5% 2,157 754 8,556 1,440 16.8% -27.6 -84.9 7,003 -31.0% 115.0 60.89 -20.6% 0.0 FY11 51,402 11.1% 24,369 17,000 10,033 19.5% 1,435 8,598 16.7% 999 1,175 8,774 1,316 15.0% -20.3 0.0 7,438 -8.0% 122.3 60.80 -0.1% 10.5 FY12E 53,284 3.7% 25,151 16,518 11,615 21.8% 1,550 10,065 18.9% 851 1,066 10,279 2,313 22.5% -65.2 0.0 7,901 22.6% 126.0 62.73 3.2% 12.5 FY13E 57,234 7.4% 27,526 17,742 11,965 20.9% 1,640 10,325 18.0% 851 1,145 10,618 2,389 22.5% 0.0 0.0 8,229 8.8% 126.0 65.33 4.1% 13.1 Balance Sheet Y/E June (` mn) Share Capital Reserves & Surplus Minority Interest Net Worth Total Loans Deferred Revenue Minority Interest Sources of Funds PPE, net Add : Capital WIP Total Fixed Assets Investments Deferred Tax Assets, net Inventories Sundry Debtors Cash and bank balances Loans and advances Current Liabilities Provisions Net Current Assets Application of Funds BVPS (Rs) Financial Ratios Y/E June Profitability & Return ratios (%) EBITDA margin EBIT margin Net margin ROE ROA ROCE Working Capital & Liquidity ratios Receivables (days) Current ratio (x) Cash ratio (x) Turnover & Leverage ratios (x) Gross fixed asset turnover Total asset turnover Debt-to-Equity ratio Valuation ratios (x) EV/Sales EV/EBITDA P/E P/BV 2.0 8.2 10.8 2.6 1.8 9.3 10.9 2.4 1.7 8.0 10.5 2.5 1.6 7.8 10.1 2.1 5.0 0.8 0.5 7.1 0.9 0.4 5.5 0.9 0.4 5.7 0.8 0.3 82 3.3 0.4 89 4.2 0.5 89 3.9 0.2 89 4.8 1.1 FY10 24% 22% 15% 24% 12% 16% FY11 20% 17% 14% 22% 12% 16% FY12E 22% 19% 15% 24% 13% 17% FY13E 21% 18% 14% 21% 12% 15% FY10 1,223 27,642 28,865 13,672 7,677 139 50,354 5,940 3,312 9,252 30,145 276 10,420 2,187 6,739 5,895 2,770 10,681 50,354 251.0 FY11 1,260 32,254 33,514 12,227 5,837 160 51,738 5,775 1,500 7,275 29,081 638 12,468 2,666 8,321 5,631 3,080 14,745 51,738 274.0 FY12E 1,260 32,052 33,312 13,672 6,051 160 53,195 8,202 1,500 9,702 29,081 638 12,925 1,254 8,626 5,837 3,192 13,775 53,195 264.5 FY13E 1,260 38,412 39,672 13,672 6,500 160 60,003 8,561 1,500 10,061 29,081 638 13,883 6,775 9,265 6,269 3,429 20,224 60,003 315.0

Net Change in cash & cash eq (2,935) Forex translation effect (608) Beginning cash & cash eq 4,943 Closing cash & cash eq 1,400 [Source: Company, Jaypee Research Estimates]

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Tech Mahindra Limited

27 May 2011

Jaypee Research Desk

www.jaypeeindia.com www.jaypeeusa.com

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