21 March 2012
Update | Sector: IT
Tech Mahindra
BSE SENSEX
S&P CNX
17,602
5,365
CMP: INR684
Tech Mahindra, Mahindra Satyam to merge
Neutral
+
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
TECHM IN
127.4
798/524
8/2/-2
87.1
1.7
2:17 swap ratio; synergies over time; near term growth headwinds
Combined entity snapshot
INR b
FY12E FY13E
Revenue
119.2 131.7
EBITDA
19.3
22.1
PAT
16.2
15.6
(Ex-restructuring fees)
No. of Shares - m
211
211
(ex-Treasury)
EPS (INR)
70.1
66.1
EPS Gr. (%)
38.1
-5.7
P/E (x)
9.8
10.3
The Board of Directors at Tech Mahindra and Mahindra Satyam approved the merger
ratio of 2 Tech Mahindra shares for every 17 shares of Mahindra Satyam.
The joint entity will have USD2.47b revenue in FY12, 75,000+ strong workforce and
350+ active clients, across 54 countries.
Our estimate for total PAT stands at INR14.8b in FY12E and INR14b in FY13E. On a
diluted share base of 211m (ex 24m treasury shares), this implies an EPS of INR70.1 in
FY12E and INR66.1 in FY13E.
The companies expect synergy from leveraging each other's expertise, economies of
scale, and standardization of business practices. We expect the synergy benefits to
start reflecting in the financials only over a period of time. However, key headwinds
persist in the near-medium term: (1) Muted revenue outlook at Satyam, and (2)
Uncertainty over BT revenues at Tech Mahindra.
The combined entity trades at 10.3x FY13E earnings. Even if we value Satyam at 12x
and Tech Mahindra at 9x FY13E PAT, our resulting target price of INR734 implies 7%
upside. Maintain Neutral.
2:17 swap ratio
The Board of Directors at Tech Mahindra and Mahindra Satyam approved the
merger ratio of 2 Tech Mahindra shares for every 17 shares of Mahindra Satyam.
The Mahindra Group will own 26.3% in the combined entity, British Telecom
will own 12.8%, 10.4% will be held as treasury stock, 34.4% to be held by the
public shareholders of Mahindra Satyam and the balance 16.1% will be held by
the public shareholders of Tech Mahindra.
Tech Mahindra will issue 103.4m new shares, thereby increasing its outstanding
shares to 230.8m and its equity capital to INR2,308m.
The completion of the merger process remains 6-9 months away.
Shareholding pattern (%)
Combined entity - Post merger
Treasury stock 10.4
British Telecom 12.8
Others,
50.5
Mahindra group 26.3
Combined entity: 75,000+ workforce, USD2.4b revenue
Tech Mahindra financial summary
Y/E March
FY11 FY12E FY13E
Sales (INRb) 48.4 55.3 60.8
EBITDA (INR b) 9.9
9.2 10.2
NP (INR b)
7.1
8.8
8.5
EPS (INR)
54.3 66.2 64.7
EPS Gr. (%)
7.4 22.1 (2.4)
BV/Sh. (INR) 266.0 331.7 410.9
P/E (x)
12.6 10.3 10.6
P/BV (x)
2.6
2.1
1.7
EV/EBITDA (x) 9.7 10.4
8.7
EV/Sales (x)
2.0
1.7
1.4
RoE (%)
30.2 27.3 21.3
RoCE (%)
22.1 21.1 17.1
The combined entity will have approximately 75,000+ strong work force and 350+
active clients, across 54 countries. Our estimates suggest combined revenue of
USD2.47b in FY12E and USD2.63b in FY13E.
Vertical mix:
Revenues of the merged entity will have ~53% contribution from
Telecom and Retail verticals, followed by 17% from Manufacturing. BFSI and
Technology, Media & Entertainment will constitute ~10% each.
Geography mix:
42% of revenue from North America, 35% from Europe and 23%
from Rest of the World.
FY12E PAT of INR14.8b, EPS of INR70.1:
Our estimate for total PAT stands at INR14.8b
in FY12E and INR14b in FY13E. On a share base of 211m (excluding treasury shares),
this implies an EPS of INR70.1 in FY12E and INR66.1 in FY13E (excluding the
restructuring fees).
24m treasury shares:
The merger has also created 24m treasury shares, which will
serve the purpose of ready liquidity in case of an investment opportunity.
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); +91 22 3982 5424
Nitin Padmanabhan
(Nitin.Padmanabhan@MotilalOswal.com); +91 22 3982 5426

Tech Mahindra
Telecom to continue to be the dominant segment
Merged entity revenues at INR132b in FY13E, PAT at INR15.6b
Source: Company/MOSL
Tech Mahindra Quarterly Performance (Indian GAAP) - Combined Entity
Y/E March
Revenues
Q-o-Q Change (%)
Direct Cost
Other Operating Exps
Operating Profit
Margins (%)
Other Income
Interest
Depreciation
PBT bef. Extra-ordinary
Provision for Tax
Rate (%)
Minority Interest
Net Income bef. Extra-ordinary
Q-o-Q Change (%)
Effect of restructuring fees
Adj. Net Inc. (excl prior period items)
Q-o-Q Change (%)
New Share Count
Diluted EPS (INR)
USD Revenues
Q-o-Q Change (%)
1Q
27,264
3.4
17,841
4,905
4,518
16.6
1,469
268
734
4,984
935
18.8
-13
4,062
-10.1
390
3,672
-9.8
211
17.4
610
4.7
2Q
29,110
6.8
18,689
5,962
4,459
15.3
1,939
741
743
4,914
971
19.8
-21
3,964
-2.4
390
3,574
-2.7
211
16.9
626
2.7
FY12
3Q
31,630
8.7
20,324
6,182
5,124
16.2
1,660
365
732
5,686
1,084
19.1
5
4,597
16.0
417
4,180
17.0
211
19.8
614
-2.0
4QE
31,177
-1.4
20,070
5,913
5,194
16.7
650
301
819
4,723
942
19.9
-2
3,784
-17.7
385
3,399
-18.7
211
16.1
622
1.3
1Q
32,470
4.1
20,893
5,985
5,592
17.2
672
301
784
5,178
1,082
20.9
10
4,086
8.0
385
3,701
8.9
211
17.5
634
2.0
2Q
32,875
1.2
21,348
5,875
5,652
17.2
717
301
966
5,103
1,301
25.5
-1
3,803
-6.9
385
3,418
-7.7
211
16.2
652
2.8
FY13E
3Q
33,109
0.7
21,864
5,833
5,412
16.3
772
301
856
5,027
1,249
24.9
8
3,770
-0.9
385
3,385
-1.0
211
16.0
666
2.3
FY12E
FY13E
4Q
33,261 119,181 131,714
0.5
19.3
10.5
21,944 76,925
86,049
5,845 22,962
23,537
5,472 19,294
22,128
16.5
16.2
16.8
829
5,718
2,990
301
1,676
1,204
853
3,029
3,459
5,147 20,307
20,455
1,278
3,932
4,911
24.8
19.4
24.0
6
-31
22
3,862 16,407
15,521
2.5
32.0
-5.4
385
1,582
1,540
3,477 14,825
13,981
2.7
38.1
-5.7
211
211
211
16.4
70.1
66.1
680 2,471.5
2,632
2.0
12.8
6.5
E: MOSL Estimates
Synergy from leveraging each other's expertise, economies of scale
The joint entity will have a unified 'go-to-market' strategy and a more diversified
revenue footprint geographically. The combination will benefit from operational
synergies, economies of scale, sourcing benefits, and standardization of business
processes.
The management plans to -
(1) Leverage Tech Mahindra's expertise in Mobility, System Integration, and delivery
of large transformations
21 March 2012
2

Tech Mahindra
(2) Better penetrate the opportunity presented by Mahindra Satyam's clients across
multiple verticals and
(3) Enable a more complete value proposition to be delivered to Tech Mahindra clients
through Satyam's expertise in Enterprise solutions.
The focus will be on account mining with the opportunity to cross-sell the services to
existing clientele. Earlier, Mahindra Satyam had already slated its strategy of focusing
on existing set of customers and trying to grow these accounts more aggressively.
Despite Tech Mahindra operating only in the Telecom vertical, the cross-sell
opportunities arise mainly from services, as themes like Mobility and Analytics can
be mapped across verticals.
Synergies to be realized only over time; little upside to Tech Mahindra on
combined entity's EPS; Remain Neutral
We expect the synergy benefits to start reflecting in the financials only over a period
of time. Key headwinds in the near-medium term are:
(1) Muted revenue outlook at Satyam, and
(2) Uncertainty over BT revenues at Tech Mahindra.
Adjusting for the new share count and considering the combined financials of two
companies, we arrive at an EPS of INR66.6 (after excluding the impact of INR500m
restructuring fees every quarter).
The combined entity trades at 10.3x FY13E earnings. Even if we value Satyam at 12x
and Tech Mahindra at 9x FY13E PAT, our resulting target price of INR734 implies 7%
upside. We remain
Neutral
on Tech Mahindra. Triggers to the stock will be limited in
the absence of acceleration in merged entity's revenue growth and/or visible
expansion in margins.
Revenue growth sluggish over the past couple of quarters at both Tech Mahindra and Mahindra Satyam
USD
Source: Company/MOSL
21 March 2012
3

Tech Mahindra
Financials and Valuation
Income Statement
Y/E March
Sales
Change (%)
Total Expenses
EBITDA
% of Net Sales
Depreciation
Interest
Other Income
PBT
Tax
Rate (%)
PAT
Minority Interest & EO items
Share of associate's profits
PAT before EO
Effect of restructuring fees
PAT after RF before EO
Extraordinary Items (EO)
PAT after EO
Change (%)
FY10
46,254
3.6
34,929
11,325
24.5
1,338
2,184
754
8,557
1,440
16.8
7,118
113
1,260
8,265
-1,663
6,601
85
6,686
-39.6
FY11
48,413
4.7
38,518
9,895
20.4
1,435
999
1,174
8,635
1,315
15.2
7,320
652
2,120
8,788
-1,695
7,093
629
7,722
15.5
FY12E
55,256
14.1
46,036
9,220
16.7
1,616
1,556
1,645
7,692
1,615
21.0
6,077
58
4,315
10,334
-1,580
8,754
0
8,754
13.4
(INR Million)
FY13E
60,847
10.1
50,671
10,176
16.7
1,536
1,096
411
7,955
1,830
23.0
6,125
92
4,051
10,085
-1,540
8,545
0
8,545
-2.4
Balance Sheet
Y/E March
Share Capital
Share Premium
Reserves
Net Worth
Minority Interest
Loans
Deferred Revenue
Capital Employed
Gross Block
Less : Depreciation
Net Block
CWIP
Investments
Deferred Tax Assets
Curr. Assets
Debtors
Cash & Bank Balance
Loans & Advances
Other Current Assets
Current Liab. & Prov
Creditors
Provisions
Net Current Assets
Application of Funds
FY10
1,223
2,374
25,268
28,865
139
13,672
0
42,676
11,312
5,269
6,043
3,208
30,145
276
19,346
10,420
2,187
6,725
14
16,342
13,572
2,770
3,004
42,676
FY11
1,260
2,374
29,881
33,514
159
12,227
5,837
51,737
12,783
6,613
6,170
1,105
29,080
638
23,455
12,468
2,666
8,315
6
8,711
5,631
3,080
14,744
51,737
FY12E
1,272
2,374
38,597
42,242
172
13,700
4,766
60,881
15,746
8,229
7,517
1,105
31,065
712
29,873
16,930
3,852
9,090
2
9,392
10,504
3,080
20,481
60,881
(INR Million)
FY13E
1,272
2,374
48,682
52,327
172
13,700
3,766
69,965
18,146
9,765
8,381
1,105
31,065
712
38,559
17,769
11,247
9,541
2
9,858
9,361
3,080
28,702
69,965
E: MOSL Estimates
4
21 March 2012

Tech Mahindra
Financials and Valuation
Ratios
Y/E March
Basic (INR)
EPS
Diluted EPS
Cash EPS
Book Value
DPS
Payout %
Valuation (x)
P/E
Cash P/E
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios
Debtors (Days)
Fixed Asset Turnover (x)
Leverage Ratio
Debt/Equity Ratio(x)
FY10
54.0
50.5
60.7
236.0
3.5
6.9
FY11
56.3
54.3
65.2
266.0
5.6
10.3
FY12E
68.7
66.2
78.5
331.7
6.5
9.8
FY13E
67.1
64.7
76.3
410.9
6.3
9.8
13.5
11.3
8.4
2.0
2.9
0.5
12.6
10.5
9.7
2.0
2.6
0.8
10.3
8.7
10.4
1.7
2.1
0.9
10.6
9.0
8.7
1.4
1.7
0.9
34.6
33.9
30.2
22.1
27.3
21.1
21.3
17.1
77
4.5
86
4.0
97
3.9
104
3.6
0.5
0.4
0.3
0.3
Cash Flow Statement
Y/E March
CF from Operations
Change in Working Capital
Net Operating CF
Net Purchase of FA
Net Purchase of Invest.
Net Cash from Invest.
Inc./(Dec) in Equity & related
Proceeds from LTB/STB
Dividend Payments
Cash Flow from Fin.
Free Cash Flow
Net Cash Flow
Opening Cash Balance
Add: Net Cash
Closing Cash Balance
FY10
9,549
2,283
11,832
-4,069
-25,799
-29,868
1,670
13,672
-501
14,841
7,763
-3,195
5,382
-3,195
2,187
FY11
15,718
-11,261
4,457
541
1,065
1,606
-3,316
-1,445
-823
-5,584
4,998
479
2,187
479
2,666
FY12E
5,993
274
6,267
-2,963
-1,985
-4,948
-639
1,473
-967
-133
3,303
1,186
2,666
1,186
3,852
(INR Million)
FY13E
11,979
-2,183
9,796
-2,400
0
-2,400
944
0
-944
0
7,396
7,396
3,852
7,396
11,247
E: MOSL Estimates
21 March 2012
5

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4. Investment Banking relationship with company covered
Tech Mahindra
No
No
No
No
Mahindra Satyam
No
No
No
No
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