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  • Company update: Tech Mahindra — Add — TP Rs.775

    Acquisitions perform better

    Publish date: July 9, 2018

    Tech Mahindra’s annual report put forth the good and the bad. Under the positives are the improved performances of its acquisitions, the fall in pass-through revenues and the increase in dividend payment, whereas the sore points are the increase in payment collection days and the lack of clarity surrounding the chairman’s compensation.

    Key Highlights

    • Tech Mahindra has spent considerably on acquiring firms in the last five years — it paid Rs.14.8 billion to acquire firms in FY2018 alone. While the ‘value’ acquisitions need to perform better, the legacy buys have shown an improvement, though there is still room for improvement. Overall, acquisitions have contributed 11% to their earnings growth in FY2018.
    • The acquisitions made before 2015-16 have become profitable, though in net profit terms, they are still below the FY2016 levels.
    • Pass-through revenues have slid. That’s because hardware, software and project-specific expenses (lower tax treatment) was whittled down to 4.9% of revenues, 1.4% less than the FY2017 levels.
    • The quantum of chairman’s compensation remains unclear. But what we gather is that the chairman — the highest-paid CEO in the industry — has got 1.85 million restricted stock units (RSUs) at Rs.5, which will be vested for over four years. However, ratio of compensation to net profit has come down from the previous financial year.
    • The payment collection cycle has been stretched by a fortnight — from 93 days to 107 days. The reason for the longer receivables are longer credit tenure demanded by clients and inefficient collection system. We don’t believe this is like to improve in the near future.
    • The company also increased the dividend payment ratio from 37% in FY2017 to 43% this time around.

    Valuation & outlook

    We have a constructive view of the company due to attractive stock valuation, Rupee depreciation, increased revenues in the next two-three years and better performances of its acquisitions and telecom portfolio.

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