Tech Mahindra Ltd originally started as a JV between the Mahindra Group & British Telecom, with the latter being the company's largest client and forming majority of the company's revenues too. Slowly the company started diversifying it's client base with the contribution of non-BT business increasing year after year. At one point BT decided to exit from the ownership of the company and the Mahindra group took complete management control. Mahindra group then wanted to shed the tag of being BT's outsourcing company as early as possible. Apart from aggressively going after growing non-BT business, the company was looking for acquisition. It grabbed the scam-tainted Satyam in the Govt. monitored auction.
Since the acquisition of Satyam Computers, the ride has not been smooth for Tech Mahindra, but it has done pretty well to gradually absorb all the hiccups and move towards growing the company to a respectable size in terms of Revenues as well as Profits. For a few years the company's management focused on bring back Satyam Computers (renamed as Mahindra Satyam) operations back to normal. It took some time to sort out all the court cases against Satyam, then there were some substantial write-offs, but all things were sorted out by FY'13. Till that point Mahindra Satyam was bigger than Tech Mahindra. By the end of FY'13, the merger of the two companies was decided and Tech Mahindra started declaring single consolidated results from FY'14 onwards.
( Click Here for Tech Mahindra's Results Summary Page )
Tech Mahindra has done well on the Total Income growth front, post merger. The company has managed to maintain growth in the 15 to 20% range. But the problem is with the company's profitability in the last 4-5 quarters. Look at the EBITDA chart. Tech Mahindra's T-T-M EBITDA has been more or less flat in the last 4 quarters, despite a decent growth in Total Income. Tech Mahindra's T-T-M EBITDA margin has dropped from 23.12% in December'2013 to 20.17% in December'2014. The Net Profit has been a bit lumpy mainly because a couple of large Exceptional Items during FY'13 and FY'14. The effect of the Exceptional Items got over by September'2014. So the T-T-M Net Profit reflects the true Net Profit the company has posted Operationally. For the 12-months ending Dec'14, Tech Mahindra has posted an EPS of Rs.115/- and a Net Profit margin of 12.88%. What is a bit of a concern is that Tech Mahindra+Mahindra Satyam had recorded an EBITDA margin of 22.28% for 12-months ending March'2013 (pre-merger) and the same has dropped to 20.17% by December'2014. A merger should have helped improve operational efficiencies in most cases, but in case of Tech Mahindra, there has been an erosion of margins. That could be due to change in business composition, but we will have to see how the numbers turn out in the coming quarters.
Coming to Tech Mahindra's valuations, the stock has seen a dream run in the last 2 years. During these 2 years, the Tech Mahindra stock has rallied from levels of around Rs.1100 to over Rs.2800 levels. Does the company deserve this kind of rise in valuations? At the current price of over Rs.2800/-, Tech Mahindra trades at about 25 times it's T-T-M EPS of Rs.115/-. This P/E rating is on-par or slightly higher than what TCS commands. I find this a bit on the ridiculous side. TCS has had a much more consistant history of stronger growth and profitability. Tech Mahindra in no way deserves a higher P/E rating than TCS. On the back of the huge rally in it's stock price, Tech Mahindra has recently announced a stock split of 1:2 and coupled that with a Bonus issue in the 1:1 ratio. That means a person holding shares of Tech Mahindra will see his holding multiply by 4 soon. On the Ex-date, the stock of Tech Mahindra will trade at about one-fourth of the current levels (i.e. about 75% lower).
My recommendation to shareholders of Tech Mahindra, especially the ones who have enjoyed the rally over the last 2 years to book atleast 50% profits, i.e. sell atleast 50% of your holding, if not more, either before the Ex-date or immediately after. As per my estimate, this stock should see a decent correction, unless the company starts posting improved profitability numbers in the coming quarters.
Since the acquisition of Satyam Computers, the ride has not been smooth for Tech Mahindra, but it has done pretty well to gradually absorb all the hiccups and move towards growing the company to a respectable size in terms of Revenues as well as Profits. For a few years the company's management focused on bring back Satyam Computers (renamed as Mahindra Satyam) operations back to normal. It took some time to sort out all the court cases against Satyam, then there were some substantial write-offs, but all things were sorted out by FY'13. Till that point Mahindra Satyam was bigger than Tech Mahindra. By the end of FY'13, the merger of the two companies was decided and Tech Mahindra started declaring single consolidated results from FY'14 onwards.
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T-T-M Numbers |
Tech Mahindra has done well on the Total Income growth front, post merger. The company has managed to maintain growth in the 15 to 20% range. But the problem is with the company's profitability in the last 4-5 quarters. Look at the EBITDA chart. Tech Mahindra's T-T-M EBITDA has been more or less flat in the last 4 quarters, despite a decent growth in Total Income. Tech Mahindra's T-T-M EBITDA margin has dropped from 23.12% in December'2013 to 20.17% in December'2014. The Net Profit has been a bit lumpy mainly because a couple of large Exceptional Items during FY'13 and FY'14. The effect of the Exceptional Items got over by September'2014. So the T-T-M Net Profit reflects the true Net Profit the company has posted Operationally. For the 12-months ending Dec'14, Tech Mahindra has posted an EPS of Rs.115/- and a Net Profit margin of 12.88%. What is a bit of a concern is that Tech Mahindra+Mahindra Satyam had recorded an EBITDA margin of 22.28% for 12-months ending March'2013 (pre-merger) and the same has dropped to 20.17% by December'2014. A merger should have helped improve operational efficiencies in most cases, but in case of Tech Mahindra, there has been an erosion of margins. That could be due to change in business composition, but we will have to see how the numbers turn out in the coming quarters.
My recommendation to shareholders of Tech Mahindra, especially the ones who have enjoyed the rally over the last 2 years to book atleast 50% profits, i.e. sell atleast 50% of your holding, if not more, either before the Ex-date or immediately after. As per my estimate, this stock should see a decent correction, unless the company starts posting improved profitability numbers in the coming quarters.
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