Tech Mahindra finds the going tough, Citi keeps negative view

Post-results, Citi in its brokerage report has maintained its negative view on Tech Mahindra, a leading IT player. Citi has set a price target for the company at Rs 700. Tech Mahindra currently trades at Rs 654. Following are the key points of the report.

[caption id="attachment_16603" align="alignleft" width="380" caption="For Tech Mahindra, the attrition rate hovered at 25%. Arko Datta/Reuters"][/caption]

Tech Mahindra racked up a 3.6% revenue growth at Rs 1,261.5 crore for the March quarter over the previous period. The company's forex gains stood at $4.1 million against $8 million in Q3, pushing the other income down. Revenue from its main client, British Telecom (BT), turned lower by 3%.

Earnings before interest, tax, depreciation and amortisation (EBITDA) margins were flat at 20.5%. Cost headwinds still remain as selling, general and administrative (SG&A) expenses went up 18%.

The company had an integrated share of Satyam Computers Q3/Q4 profits in the March quarter. Net profit (excluding Satyam Computers Q4), at Rs 230 crore, benefited from a lower tax rate, which is lower by 500 basis points. Looking forward, Tech Mahindra is expected to consolidate Satyam's financials in the same quarter.

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Revenues from BT are likely to stay stable. For Q4, the attrition rate hovered at 25%. The headcount addition was 1,609 software professionals as the company is set to add 3,500 campus offers for FY12. The tax rate is likely to go up 800-900 basis points in FY12.

There are worries on the debt front. Net debt has surged from Rs 830 crore to Rs 960 crore over subsequent quarters. Tech Mahindra's core business is likely to face challenges, given the high domain (telecom) and client concentration (BT). Satyam faces a tough supply side/margin scenario, going by the demand environment in the sector.