The Hindu Business Line : Tech Mahindra: Buy

Investors with a two-year perspective can consider taking an exposure in the Tech Mahindra stock. At the current market price, the stock is trading at a price earnings multiple of 30 times its annualised 2006-07 earnings. While the PEM appears stiff, the $1-billion, five-year contract bagged from BT Global Services in December has enhanced the revenue visibility considerably. The revenues from this contract will start flowing in from April. Even if a slowdown in tech spending were to materialise, working with strategic telecom clients such as BT will help Tech Mahindra mitigate its adverse impact to some extent.

Interaction with the senior BT management recently has strengthened our view that they are comfortable with Tech Mahindra as their preferred vendor and the contract was won in a competitive environment. BT, which is a 32.4-per cent shareholder in Tech Mahindra, is also comfortable with the company expanding its relationships with other telecom players such as AT&T, Alcatel-Lucent or Motorola. Our medium-term recommendation on the stock impounds lower margins in the first year, with margins likely to reach normal levels from the second year. For the third quarter ended December 31, 2006, the operating profit margins from the telecom service provider segment, which accounts for a substantial chunk of its revenues, were fairly robust at 38 per cent.

With Infosys Technologies management guidance for the year 2007-08 round the corner, any turbulence on this front may lead to a PEM derating across the board. But any correction in the markets will be a good opportunity to step up exposures in the Tech Mahindra stock. We are revising our November 2006 recommendation of "Book Profits partially" (especially those who had entered the stock through the IPO) made prior to the BT contract.

The principal risks to our recommendation are: High client concentration, project execution risks, slowdown in telecom spending, wage inflation/attrition in a competitive environment and rupee appreciation.

Krishnan Thiagarajan

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