5 TECH MAHINDRA LIMITED

RESEARCH
EQUITY RESEARCH June 16, 2008

x RESULTS REVIEW Tech Mahindra Limited Buy

Share Data Focusing on large deals
Market Cap Rs. 95.76 bn • Traction in the BTGS deal: Tech Mahindra (TM) reported a 5.3% qoq
Price Rs. 789.55
growth in revenue, driven by a 12.2% upswing in BT revenue even as
BSE Sensex 15,395.82
Reuters TEML.BO
non-BT portion went down by 5.5%. The Company managed to realise
Bloomberg TECHM IN USD 20 mn from the BTGS deal in Q4’08, as against USD 10 mn in
Avg. Volume (52 Week) 0.09 mn Q3’08. TM now has about 1,200 people working on the deal, which is
52-Week High/Low Rs. 1,550.00 / 614.80
expected to significantly contribute to its top line in the coming quarters.
Shares Outstanding 121.29 mn
• EBITDA margin almost flat: EBITDA margin registered a marginal
Valuation Ratios (Consolidated)
decline of 17 bps qoq to 21.8%. A 71 bps reduction in the SG&A share
Year to 31 March 2009E 2010E
EPS (Rs.) 69.6 87.7 and a 4% increase in the utilization rate were offset by the appreciation
+/- (%) 18.1% 25.9% in the rupee and a rise in transition costs (TM is currently engaged in
PER (x) 11.3x 9.0x
transitions with a number of customers). We believe that EBITDA margin
EV/ Sales (x) 2.0x 1.6x
EV/ EBITDA (x) 8.9x 7.0x will remain stable at 22-23% in FY09E.

Shareholding Pattern (%)

• Aiming for mega deals: The Company has signed five to six large-sized
Promoters 84 deals in the last three quarters, which includes a five-year deal with BT
FIIs 1
worth USD 350 mn. TM has an order backlog of over USD 2 bn for the
Institutions 4
Public & Others 11 next four to five years and we project a 26% revenue growth in FY09E.
Relative Performance • Based on the Company’s initial guidance, we have revised our estimates
2,500 for the net addition of employees by another 5,000. Revenues have been
2,000
revised upwards by 10.6% to Rs. 47.5 bn, taking into consideration the
1,500
1,000
rupee depreciation, the revised employee addition, and the deals
500 currently in the pipeline.
0
Key Figures (Consolidated)
May-08
Aug-07

Nov-07

Apr-08
Jun-07
Jul-07

Sep-07
Oct-07

Dec-07
Jan-08
Feb-08
Mar-08

Jun-08

Quarterly Data Q4'07 Q3'08 Q4'08 YoY% QoQ% FY'07 FY'08 YoY%
(Figures in Rs. mn, except per share data)

Tech Mahindra Rebased BSE Index Net Sales 8,745 9,704 10,218 16.8% 5.3% 29,290 37,661 28.6%
EBITDA 2,241 2,129 2,224 (0.8%) 4.5% 7,382 8,257 11.9%
Net Profit 1,961 1,995 2,188 11.6% 9.7% 6,125 7,701 25.7%

Margins (%)

EBITDA 25.6% 21.9% 21.8% 25.2% 21.9%

NPM 22.4% 20.6% 21.4% 20.9% 20.4%

Per Share Data (Rs.)

EPS 15.0 15.2 18.4 22.1% 20.4% 47.0 58.9 25.5%

Please see the end of the report for disclaimer and disclosures. -1-
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Valuation
At the current market price (CMP) of Rs. 789.6, the stock is trading at a
forward P/E of 11.3x and 9.0x for FY09E and FY10E, respectively, as against
the industry average of 15.5x for FY09E. Based on DCF valuation, we have
arrived at a price of Rs. 925 for the next nine months, showing an upside of
17% from the current level. Hence, we maintain our Buy rating.

Result Highlights

BTGS deal gaining traction

TM garnered USD 20 mn from the BTGS deal in Q4’08, as against
USD 10 mn in Q3’08. The fourth quarter also saw an increase in the number
of people working on the deal from 700 to 1,200. Revenue recognized from
the deal is slowly but steadily gaining momentum. The management expects
significant revenue visibility from the deal in the coming quarters.

Stable margins
EBITDA margin went down by 17 bps qoq to 21.8% in Q4’08. The
appreciation in the rupee coupled with a rise in transition costs led to this
decline. However, the Company managed to enhance the utilization rate
from 69% in Q3’08 to 73% in Q4’08. Moreover, SG&A expenses as a
percentage of revenue fell to an all-time low of 14%. We believe that margins
will remain stable in the near term at around 22-23%, as some of the
transitions are in the process of getting completed. However, margins may
improve if the Company is able to further reduce SG&A costs and improve
utilization.

Employee retrenchment
TM reduced its manpower base by 271 employees (bulk of them belonging to
the BPO segment) in Q4’08. Consequently, the utilization rate improved by
4% to 73%. TM’s efforts to improve employee efficiency has produced
positive results with the utilization rate going up from 63% in Q2’08 to 73% in
Q4’08. The Company plans to recruit 5,500 engineers from campuses in the
next fiscal and has around 500-700 offers in the pipeline.

Please see the end of the report for disclaimer and disclosures. -2-
 5 TECH MAHINDRA LIMITED
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EQUITY RESEARCH June 16, 2008

Key Events

• Tech Mahindra has entered into a strategic partnership with Veracode,

which will further strengthen the Company’s application security
capability.
• The Company has won a USD 2.5 mn deal from Botswana
Telecommunication to provide system integration services for a
three-year period, covering mobile, Internet, and fixed-line businesses.
• The Company has set up a new centre in Chennai that will
accommodate 1,400 software engineers.

Key Risks

Key concerns to our rating include any appreciation in the rupee, wage
inflation, high dependence on BT, and issues related to large-sized deals.

Outlook

TM experienced a satisfactory fourth quarter as the BT account became

stronger by 12.2% and the BTGS deal generated healthy revenue. We
expect significant revenue addition from BTGS in the coming quarters. TM’s
focus on large-sized deals provides medium-term revenue visibility and we
expect its top line to grow by around 26% in FY09E. However, high
exclusivity payment remains a concern for the Company as it is not
refundable if the deal is not signed.

We expect EBITDA margin to remain stable at 22-23% for FY09 as some of

the transitions are in the process of getting completed. The margin may
improve if the Company manages to reduce its SG&A expenses and
increase utilization levels. On the other hand, it may fall because of an
increase in transition-related activities.

Based on the Company’s initial guidance, we have revised our estimates for
the net addition of employees by another 5,000. Revenues have been
revised upwards by 10.6% to Rs. 47.5 bn, taking into consideration the rupee
Please see the end of the report for disclaimer and disclosures. -3-
 5 TECH MAHINDRA LIMITED
RESEARCH
EQUITY RESEARCH June 16, 2008

depreciation, the revised employee addition, and the deals currently in the
pipeline.

At the current market price (CMP) of Rs. 789.6, the stock is trading at a
forward P/E of 11.3x and 9.0x for FY09E and FY10E, respectively, as against
the industry average of 15.5x for FY09E. Based on DCF valuation, we have
arrived at a price of Rs. 925 for the next nine months, showing an upside of
17% from the current level. Hence, we maintain our Buy rating.
Key Figures (Consolidated)
Year to March FY06 FY07 FY08 FY09E FY10E CAGR (%)
(Figures in Rs. mn, except per share data) (FY08-10E)

Net Sales 12,427 29,290 37,661 47,490 59,452 25.6%

EBITDA 2,680 7,382 8,257 10,658 13,554 28.1%
Net Profit 2,355 6,125 7,701 9,098 11,456 22.0%

Margins (%)

EBITDA 21.6% 25.2% 21.9% 22.4% 22.8%

NPM 19.0% 20.9% 20.4% 19.2% 19.3%

Per Share Data (Rs.)

EPS 18.7 47.0 58.9 69.6 87.7 22.0%
PER (x) 28.0x 30.4x 13.4x 11.3x 9.0x

Please see the end of the report for disclaimer and disclosures. -4-
 5 TECH MAHINDRA LIMITED
RESEARCH
EQUITY RESEARCH June 16, 2008

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