20 November 2014
Update | Sector: Technology
Tech Mahindra
BSE Sensex
28,068
S&P CNX
8,402
CMP: INR2,704
TP: INR3,250
Buy
Acquires Lightbridge communication corporation
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
TECHM IN
235.5
2,719/1,643
18/35/-5
637.0
10.3
Financial Snapshot (INR Billion)
Y/E Mar
2015E 2016E 2017E
Sales
EBITDA
Adj. PAT
EPS Gr. (%)
RoE (%)
RoCE (%)
Payout (%)
P/E (x)
222.7 290.3 331.8
43.9
30.3
13.1
28.6
29.5
16.1
19.8
57.3
39.3
29.6
29.0
31.7
16.9
15.3
9.4
64.6
44.7
13.7
26.5
29.8
17.4
13.4
7.9
Signals intent to swiftly capitalize on the network services opportunity
Acquires LCC, strengthens its network services prowess
TECHM announced definitive agreement to acquire 100% stake in global
network services leader Lightbridge Communications Corporation (LCC) for
an enterprise value of USD240m. The deal should close by 4QFY15.
LCC has significant capabilities in the network managed services space along
with relationships with marquee clientele in communication industry. The
combined company will be able to offer full range of network services to
both communications service providers as well as to the ecosystem of
partners.
Adj. EPS (INR) 136.8 177.3 201.6
Acquisition adds ~USD430m CY14E revenues, ~8% EBITDA margin
LCC’s estimated revenues in CY14 stand at USD430m, with EBITDA margin of
8%. This implies consideration of 7x CY14E EV/EBITDA. LCC also has ~USD85m
debt on its books. Normalized net margin is estimated at 3-4%.
Strategic fit, track record lends confidence on profit synergies
EV/EBITDA (x) 12.5
Shareholding pattern (%)
Sep-14 Jun-14 Sep-13
Promoter
DII
FII
36.0
10.6
39.6
36.2
10.8
39.1
36.5
15.1
32.6
The acquisition equips TECHM with complete set of capabilities in the
Network services space, readying itself to leverage the opportunity in
segment; and is a strategic fit in that regard.
Leveraging TECHM’s global delivery network is one of the avenues of
improving LCC’s current 8% profitability, and we expect gradual
improvement in LCC margins, as demonstrated in the case of Satyam.
Marginal EPS dilution in FY15, accretion in FY16
Our FY16E revenue estimate is up by 10.8% assuming 10% revenue growth at
LCC. Our FY15E EPS estimate is down marginally by 1% to INR136.8. Assuming
no synergy benefits on margins in FY16, the EPS accretion is only 0.3%, to
INR177.3.
Others
13.7
14.0
15.8
*FII includes depository receipts
Stock Performance (1-year)
Valuation View
While our earnings estimates over the next couple of years do not move
significantly in either direction, the acquisition does declare TECHM’s intent
to capitalize swiftly on the Network services potential.
We expect TECHM to grow its USD revenue at a CAGR of 25% over FY14-16
and EPS at a CAGR of 21% during this period. We are rolling over our Target
to FY17, and our revised target price of INR3250 discounts FY17E EPS by
16x. Maintain Buy.
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); +91 22 3982 5424
Siddharth Vora
(Siddharth.Vora@MotilalOswal.com); +91 22 3982 5585
Investors are advised to refer through disclosures made at the end of the Research Report.

Tech Mahindra
EVENT: Acquires LCC to strengthen its network services prowess
TECHM signed a definitive agreement to acquire100% stake in global network
services leader Lightbridge Communications Corporation (LCC) for an enterprise
value of USD240m
The share purchase agreement was signed between the companies today, and
financial closure is expected in 4QFY15 post the receipt of regulatory approvals.
Kenneth Young, CEO of LCC will now lead the company’s network practice.
CONSIDERATION: USD240m EV @ EV/EBITDA of 7x
The total enterprise value of LCC is USD240m which includes debt of USD85m on
the books of LCC.
TECHM plans to repay USD45m of debt, which will result in total outflow of
USD200m for the company in the current year.
The acquisition is expected to marginally EPS dilutive for the company in FY15
and will be EPS accretive FY16 onwards.
While 20% is the targeted margin for the combine company, in the near term
TECHM expects to improve LCC margins to low double digits
Exhibit 1: Marginal accretion to FY16 EPS (assuming no margin expansion at LCC)
FY16 scenario
INR/USD
Revenue (USD m)
Revenue (INR b)
EBITDA margin (%)
EBITDA (INR b)
Other income forgone
Cash payment (USD m)
Cash payment (INR b)
Post tax yield forgone (@6% - INR b)
Net margin (%)
Net income (INR b)
15.0
39.3
TECHM
60
4365
262
21.0
55.0
LCC
60
473
28
8.0
2.3
Combined
60
4838
290
19.7
57.3
200
12
0.72
3.2
13.6
0.9
39.5
Source: Company, MOSL
ABOUT LCC: ~USD430m CY14E revenues, ~8% EBITDA margin
LCC expects its CY14 to be ~USD430m with EBITDA margins of ~8%. Its
normalized net margin adjusted for debt repayment is between 3-4%.
The company has 5700+ employees in 55 countries; 800 employees are in US
rest are scattered across Europe, Latin America, Middle East and Africa.
LCC had revenues of USD120m in CY08 and has grown it to USD430m in CY14.
These were partly boasted by its acquisition of Leadcom Integrated Solutions Ltd
LCC is the largest independent provider of wireless engineering services founded
in 1983.
The current geographical distribution of revenues is ~30% in US, 30% from
Europe and 40% from RoW.
LCC has deep client relationship in the network services space with ongoing
engagements between 6-8 years. Top 20 clients form 80% of company revenues
2
20 November 2014

Tech Mahindra
RATIONALE: Full services provider in IT and Network
LCC has significant capabilities in the network managed services space along
with relationships with marquee clientele in communication industry. TECHM’s
acquisition of LCC will result in industry’s largest network engineering,
deployment and managed services organization.
Currently it has more than 400 clients but there is a significant overlap between
the clients of TECHM and LCC.
There are a couple of large logos with whom LCC has relationships and which
are currently not engaged in IT Services relationship with TECHM
Clients are increasingly looking for both IT and Network services from a single
vendor. The multitude of connected devices and the upgrades in technology are
rendering network management increasingly complex. Maintaining clients’
networks is also, as a result, among the faster growing spaces.
Revenue synergies emanate from full Services capability and synergies of margin
improvement will be a more gradual process, through offshoring of managed
services
OUR TAKE: Strategic fit, track record lends confidence on profit synergies
As called out by Gartner, Network-related services is a ~USD41b directly
addressable market for players like TECHM. TECHM, after satisfactorily piloting
its offerings in this space with BASE Telecom, called it out as its major focus
area, and one of the potential growth drivers. The acquisition equips the
company with complete set of capabilities to leverage the opportunity in the
segment. The management cited it as among the fastest growing spaces in the
overall Telecom services ecosystem. The acquisition is a strategic fit in that
regard
Currently, the services rendered by LCC are entirely from onsite. Leveraging
TECHM’s global delivery network is one of the avenues of improving LCC’s
current 8% profitability, and TECHM expects the improvement in margins to be
gradual going forward.
We note that TECHM had demonstrated impressive integration capabilities in
the case of Satyam as well, where it managed to increase the EBITDA margin
from 8.8% in FY11 to 21.2% by FY13.
Exhibit 2: TECHM executed Satyam integration impressively, seen in margin expansion
Source: Company, MOSL
20 November 2014
3

Tech Mahindra
CHANGE IN ESTIMATES: Marginal EPS dilution in FY15, accretion in FY16
Our FY15E EPS estimate is down marginally by 1% to INR136.8, considering the
cash outflow, which will precede the accretion of revenues to consolidated P&L.
Assuming no synergy benefits in FY16, the EPS accretion is only 0.3%, to
INR177.3.
Our FY16E revenue estimate is however, up by 10.8% to USD4.84b, assuming
10% revenue growth at LCC.
Exhibit 3: Change in estimates
Revised
FY15E
FY16E
INR/USD
USD Revenue - m
USD rev Gr.(%)
EBIDTA Margin (%)
EBIT Margin (%)
EPS - INR
60.1
3,667
18.4
19.7
17.0
136.8
60.0
4,838
31.9
19.7
17.4
177.3
Earlier
FY15E
60.1
3,667
18.4
19.9
17.2
138.4
FY16E
60.0
4,365
19.0
21.0
18.6
176.8
Change
FY15E
FY16E
0.0%
0.0%
0bp
-14bp
-19bp
-1.2%
0.0%
10.8%
1289bp
-123bp
-121bp
0.3%
Source: MOSL
VALUATION VIEW: Increased confidence on revenue momentum
While our earnings estimates over the next couple of years do not move
significantly in either direction, the acquisition does declare TECHM’s intent to
capitalize swiftly on the Network services potential. Over the medium term, we
back TECHM’s track record of executing on margins, to maintain overall
company EBITDA of ~20%.
Success in large deal wins is an encouraging indicator of TECHM’s improving
competitive prowess, even in the Enterprise segment, post the integration with
Satyam. With three large deal wins in Manufacturing in 2QFY15, growth in
Telecom will likely be compounded with Enterprise too, keeping growth outlook
sanguine. Also, its expertise in the Telecom vertical has thus far overshadowed
the structural concerns in the client industry, as it continues to increase its share
within its top accounts.
We expect TECHM to grow its USD revenue at a CAGR of 25% over FY14-16 and
EPS at a CAGR of 21% during this period. We are rolling over our Target to FY17,
and our revised target price of INR3250 discounts FY17E EPS by 16x. Maintain
Buy.
20 November 2014
4

Tech Mahindra
Story in Charts
Exhibit 4: Telecom prowess reflected in vertical mix
Retail,
Travel,
Logistics, 6
BFSI, 10
Tech,
Media, Ent,
8
Manufactur
ing, 18
Source: Company, MOSL
Telecom,
52
5.4
985
FY09
(0.9)
977
FY10
8.9
1063
FY11
8.8
1156
FY12
2633
FY13
17.7
3098
FY14
18.4
3667
FY15E
Vertical mix (%)
Others, 6
Exhibit 5: Scale and diversity lent by Satyam acquisition
Revenue (USD m)
YoY Growth (%)
127.7
Source: Company, MOSL
Exhibit 6: Active on the acquisition front – building scale and competencies
STANDALONE TECHM
Mahndra Satyam
Hutchison Global Services
Comviva
MAHINDRA SATYAM
Complex IT (Brazil)
COMBINED ENTITY
Mahindra Engineering Services
BASF Business Service Consult
Fix Stream
Lightbridge Communications Corp.
Time
Apr-09
Sep-12
Sep-12
Feb-13
Nov-13
Feb-14
Apr-14
Nov-14
Valuation (USD m)
1,133
67
95
45
121
NA
10
240
Revenue (USD m)
481 (FY11)
170
70
45
Employees
48,000
11,500
1,500
500
42
1,300
NA
60
NA
NA
430
5,700
Source: Company, MOSL
Exhibit 7: Strong execution reflected in much improved
efficiency
EBITDA margin (%)
24.5
20.4
16.7
22.2
Exhibit 8: Incremental Deal TCV keep growth outlook
sanguine
Deal TCV (USD m)
500
21.4
19.9
190
220
270
250
270
FY10
FY11
FY12
FY13
FY14
FY15E
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
Source: Company, MOSL
Source: Company, MOSL
20 November 2014
5

Tech Mahindra
Exhibit 9: Operating Metrics
Operating Metrics
Revenue by geography (%)
Americas
Europe
Rest of World
Vertical Split (%)
Telecom
Manufacturing
Tech | Media | Entertainment
BFSI
Retail | Transport | Logistics
Others
Onsite-offshore mix (%)
Onsite
Offshore
Client Metrics
No. of active clients
% of repeat business
No. of Million $ clients
USD1m+
USD5m+
USD10m+
USD20m+
USD50m+
Client concentration (%)
Top client
Top 5 Clients
Top 6-10
Top 11-20
Headcount (end of period)
Software professionals
BPO
Sales and Support
Total
IT Attrition (LTM) (%)
IT Utilization (%)
IT Utilziation (excluding trainees) (%)
Receivable Days (DSO)-Including Unbilled
Borrowings (USD m)
Cash and Cash Equivalent (USD m)
Capital Expenditure (USD m)
1QFY13
46
33
21
2QFY13
45
34
21
3QFY13
43
35
22
4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15
42
33
25
45
32
23
44
33
23
47
31
22
45
31
24
47
31
22
49
31
20
44
19
13
11
6
7
45
19
13
11
7
5
46
18
12
11
7
6
48
19
12
10
6
5
48
19
12
9
6
6
47
19
12
9
7
6
47
19
11
10
7
6
49
18
11
10
6
6
50
18.5
9.5
10
6
6
52
18
8
10
6
6
47.6
52.4
48.2
51.8
48.3
51.7
48.4
51.6
51.0
49.0
51.0
49.0
52.0
48.0
53.0
47.0
54.0
46.0
55.0
45.0
484
96
475
95
475
92
516
94
567
97
576
95
605
92
629
88
632
99
649
97
188
73
39
21
7
200
74
43
21
9
206
77
48
22
9
205
70
42
24
9
215
74
46
25
10
223
77
48
26
10
239
75
47
25
11
239
75
52
27
11
242
80
51
29
11
245
86
50
30
12
17
40
10
12
15
41
10
13
14
39
11
12
13
37
13
11
12
37
12
11
36
12
13
37
12
12
38
13
12
37
13
12
40
11
12
52,416
18,229
5,647
76,292
17
75
80
98
164.4
572.7
18.8
52,375
28,611
5,920
86,906
16
74
78
96
201.7
628.1
16.2
53,072
26,379
6,195
85,646
16
76
78
98
199.2
676
15.5
52,126 53,337 55,432 57,601 60,997 64,095 66,175
24,699 23,269 23,225 23,213 21,830 21,936 22,433
6,284 6,457 6,577 6,585 6,614 6,698 6,701
83,109 83,063 85,234 87,399 89,441 92,729 95,309
16
77
79
96
213.6
673.9
41.9
14
76
78
97
125.7
615.4
41.2
14
75
77
102
53.5
522.7
23.8
15
75
77
100
55.3
559.7
21.2
15
74
78
16
72
75
18
73
76
96
102
102
60.6
14.3
10.2
600.6 609.7
556
44.6
43.6
38.5
Source: Company, MOSL
20 November 2014
6

Tech Mahindra
Exhibit 10: Operating Metrics
1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15
Rupee USD Rate
Period closing rate
Period average Rate
Proportion of Revenues From Currencies
USD
GBP
EURO
AUD
Others
Consolidated Hedge Position
GBP In Mn
Strike rate (INR)
USD In Mn
Strike rate (INR)
Verticals (QoQ)
Telecom
Manufacturing
Tech | Media | Entertainment
BFSI
Retail | Transport | Logistics
Others
Total
Revenue by geography (QoQ)
Americas
Europe
Rest of World
Total
Client concentration (QoQ)
Top 5
Top 6-10
Top 11-20
Net additions
Software professionals
BPO
Sales and Support
Total
55.61
54.81
52.86
54.69
55
54.36
54.29
53.96
59.39
56.57
62.61
62.91
61.81
61.92
59.92
61.46
60.18
59.87
61.5
60.94
51
22
6
8
13
50
22
6
8
14
47
24
7
9
14
47
23
7
8
14
50
19
8
7
15
48
20
9
7
17
49
18
9
7
17
49
16
10
8
17
50
16
10
7
17
52
16
10
6
16
285.7
84.12
666.5
53.02
278.4
86.25
747.9
54.39
276.6
88.04
910.3
55.64
262.8
89.89
911
56.93
267.9
91.58
1081.6
58.22
244.2
92.4
899.3
58.9
211
94.2
771
59.5
170.5
95.3
783.9
60.6
144.3
97.1
1046.8
61.6
123.3
99.9
1224.2
63
7.1
4.7
4.7
4.7
22.2
-25.2
4.7
7.1
-0.8
-3.3
4.7
4.7
25.7
4.7
8.0
9.2
3.5
-6.0
-11.3
-13.8
3.5
3.7
3.7
3.7
-6.7
3.7
24.5
3.7
2.5
4.7
4.7
4.7
22.1
4.7
4.7
4.4
4.4
-4.3
15.9
4.4
4.4
4.4
8.7
-1.2
4.3
4.3
-10.6
4.3
4.3
5.8
6.5
-10.5
3.7
3.7
3.7
3.7
9.4
2.4
-11.4
5.2
5.2
5.2
5.2
2.4
7.9
4.7
4.7
0.1
7.8
9.7
4.7
1.0
-2.5
17.6
3.5
11.1
0.6
-4.6
3.7
2.4
8.0
4.7
4.7
11.5
-2.0
-0.2
4.4
-0.1
4.3
13.8
4.3
8.3
3.7
-5.0
3.7
9.7
5.2
-4.3
5.2
-7.6
7.3
4.7
-2.2
-0.4
15.2
-3.9
-1.9
22.3
-4.3
3.7
-4.3
1.9
4.7
23.7
7.3
4.4
-3.7
7.1
13.0
4.3
0.9
3.7
3.7
13.8
-11.0
5.2
-41
10,382
273
10,614
697
-2,232
275
-1,260
-946
-1,680
89
-2,537
1,211
-1,430
173
-46
2,095
-44
120
2,171
2,169
-12
8
2,165
3,396
-1,383
29
2,042
3,098
106
84
3,288
2,080
497
3
2,580
Source: Company, MOSL
20 November 2014
7

Tech Mahindra
Financials and valuation
Income Statement
Y/E March
Sales
Change (%)
Employee Cost
Other Expenses
Total Expenses
EBITDA
% of Net Sales
Depreciation
Interest
Other Income
PBT
Tax
Rate (%)
PAT
Minority Interest & EO items
PAT before EO
Change (%)
Effect of restructuring fees
PAT after RF before EO
Change (%)
Extraordinary Items (EO)
PAT after EO
2012
54,897
13.4
28,770
16,933
45,703
9,194
16.7
1,614
1,413
1,368
7,535
1,438
19.1
6,097
714
10,918
24.2
-1,618
9,299
31.1
679
9,978
2013
143,320
161.1
90,007
22,682
112,689
30,631
21.4
3,896
922
2,121
26,334
6,479
24.6
19,855
301
19,554
79.1
-1,340
18,214
95.9
0
18,214
2014
188,313
31.4
117,001
29,476
146,477
41,836
22.2
5,221
673
1,129
37,071
9,790
26.4
27,281
336
26,945
37.8
-1,117
25,828
41.8
3,342
29,170
2015E
222,671
18.2
147,213
31,548
178,760
43,911
19.7
5,999
221
3,846
41,537
11,046
26.6
30,492
209
30,283
12.4
0
30,283
17.2
0
30,283
(INR Million)
2016E
2017E
290,262
30.4
191,559
41,435
232,994
57,268
19.7
6,895
397
3,348
53,324
13,864
26.0
39,460
200
39,260
29.6
0
39,260
29.6
0
39,260
331,847
14.3
219,816
47,454
267,271
64,576
19.5
7,374
397
3,806
60,611
15,759
26.0
44,852
200
44,652
13.7
0
44,652
13.7
0
44,652
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Minority Interest
Loans
Amount pending invest.
Capital Employed
Assets
Investments
Long term loans and adv
Deferred Tax Assets
Other non-current assets
Curr. Assets
Debtors
Cash & Bank Balance
Loans & Advances
Current Investments
Other Current Assets
Current Liab. & Prov
Creditors
Provisions
Net Current Assets
Application of Funds
E: MOSL Estimates
2012
1,275
42,032
43,307
0
11,266
54,573
6,868
35,876
998
20,437
13,172
2,418
4,845
2
11,235
10,377
3,080
9,202
54,573
2013
2,316
66,214
68,530
1,349
14,702
12,304
96,885
22,318
12,429
7,433
3,477
219
89,634
33,688
34,629
12,925
1,745
6,647
41,220
8,577
32,643
48,414
96,885
2014
2,335
89,469
91,804
1,453
8,420
12,304
113,981
28,606
12,194
9,137
3,830
157
105,472
43,486
33,202
14,544
2,525
11,715
45,415
14,722
30,693
60,057
113,981
2015E
2,781
117,134
119,915
1,546
9,470
12,304
143,235
40,836
12,194
9,256
4,042
115
115,122
52,407
25,801
17,030
6,731
13,153
42,581
18,795
23,785
72,541
143,235
(INR Million)
2016E
2017E
2,781
148,110
150,891
1,546
9,470
12,304
174,211
43,941
12,194
9,256
4,042
115
149,673
72,094
36,804
17,030
6,731
17,014
49,261
22,598
26,663
100,412
174,211
2,781
183,098
185,879
1,546
9,470
12,304
209,199
46,568
12,194
9,256
4,042
115
186,409
79,923
63,868
17,030
6,731
18,856
53,635
25,098
28,537
132,774
209,199
20 November 2014
8

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)
2012
72.9
70.4
82.6
339.7
4.0
5.7
38.4
32.7
37.8
6.3
8.0
0.1
26.0
14.3
85
3.9
0.3
2013
95.2
92.8
110.7
320.0
5.0
5.9
31.8
24.4
17.3
3.7
8.2
0.2
32.6
35.3
60
5.8
0.2
2014
124.0
120.6
145.0
440.7
20.0
16.6
22.4
18.6
12.6
2.8
6.1
0.7
36.4
34.7
75
7.0
0.1
2015E
141.5
136.7
163.8
560.3
22.0
16.1
19.8
16.5
12.5
2.5
4.8
0.8
28.6
29.5
79
6.0
0.1
2016E
183.4
177.3
208.4
705.0
30.0
16.9
15.3
13.0
9.4
1.9
3.8
1.1
29.0
31.7
78
6.2
0.1
2017E
208.6
201.6
234.9
868.5
35.0
17.4
13.4
11.5
7.9
1.5
3.1
1.3
26.5
29.8
84
6.7
0.1
Cash Flow Statement
Y/E March
CF from Operations
Change in Working Capital
Other adjustments
Net Operating CF
Net Purchase of FA
Net Purchase of Invest.
Net Cash from Invest.
Inc./(Dec) in Equity
Proceeds from LTB/STB
Dividend Payments
Cash Flow from Fin.
Net Cash Flow
Opening Cash Balance
Add: Net Cash
Closing Cash Balance
2012
3,692
7,778
11,470
-2,836
-6,796
-9,632
-528
-961
-597
-2,086
-248
2,666
-248
2,418
2013
14,259
-7,608
37,353
6,651
-3,099
-1,940
-5,039
1,032
-7,036
-750
-6,754
32,211
2,418
32,211
34,629
2014
30,593
-12,302
18,292
-7,854
-5,103
-12,957
19
-1,305
-5,475
-6,762
-1,427
34,629
-1,427
33,202
2015E
32,657
-15,345
17,312
-21,707
3,846
-17,861
446
-1,223
-6,075
-6,852
-7,401
33,202
-7,401
25,801
(INR Million)
2016E 2017E
43,204
-16,867
26,336
-10,000
3,348
-6,652
0
-397
-8,284
-8,681
11,003
25,801
11,003
36,804
48,617
-5,298
43,320
-10,000
3,806
-6,194
0
-397
-9,664
-10,061
27,064
36,804
27,064
63,868
20 November 2014
9

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