Tech Mahindra - Trust Group

Tech Mahindra - Trust Group

Tech Mahindra Sector: Technology Company Update CMP: ` 499 Acquires CJS Solutions, an attractive buy Market statistics Current stock price (`) Sh...

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Tech Mahindra

Sector: Technology

Company Update

CMP: ` 499

Acquires CJS Solutions, an attractive buy

Market statistics Current stock price (`) Shares O/S (cr.) Mcap (` cr) 52W H/L (`) 6m avg. volume Bloomberg

499 97.3 48,599 564/405 2,605,370 TECHM IN

Shareholding pattern Promoters Domestic Institution Foreign Institution Non-institution of which more than 1% National Westminster Bank Life Insurance Corporation

36.24 15.45 34.45 13.86 4.92 3.63

Tech Mahindra vs Nifty Tech Mahindra

120

Nifty

110 100

80 Jun-16

Oct-16

Capital efficiency & valuations Particulars RoE (%) EPS (`) CEPS (`) P/E (x) P/BV (x) EV/EBITDA (x) Income growth (%) EBITDA growth (%) PAT growth (%)

FY16 21.4 35.6 44.3 13.3 2.6 8.0 17.9 5.3 20.0

FY17E 18.3 35.0 45.7 14.3 2.4 8.0 10.9 4.1 (0.2)

ANALYST Naushil Shah +91-22 4224 5125 [email protected]

Tech Mahindra has announced acquisition of CJS Solutions Group LLC. It is a USbased healthcare information technology consulting company that does business as The HCI Group. The deal values CJS Solutions at an enterprise value of US$110mn. Healthcare and life sciences has been one of the focus areas for Tech Mahindra globally and the acquisition will help in consolidating its position. We believe it is an attractive acquisition which is a complementary fit for Tech Mahindra. It would also aid in cross-selling services to clients coupled with scaling up of the Healthcare vertical for Tech Mahindra. Acquisition to provide cross selling and scale up of Healthcare vertical for Tech Mahindra: Tech Mahindra has announced acquisition of CJS Solutions Group LLC. It is a US-based healthcare information technology consulting company that does business as The HCI Group. The deal values CJS Solutions at an enterprise value of US$110mn. Tech Mahindra will make an upfront payment of US$89.5mn for purchase of an 84.7% stake in the firm. The balance stake of 15.3% will be acquired over a period of three years. It will be acquired with a combination of cash and borrowings, but it will mostly be funded via internal accruals. The HCI Group works with global tier-I healthcare service providers, primarily in the US and UK. It focuses on providing end-to-end implementation of electronic health record (EHR) and electronic medical record (EMR) software, training and support services. The company also has a presence in Europe, West Asia and Asia-Pacific, and employs more than 500 professionals globally. For TTM ending Sep’16, The HCI Group had revenues of US$114mn. The margins of CJS Solutions are in high single digit. The transaction is expected to close by Apr’17. If CJS Solutions achieves certain milestones, the contingent consideration would be at US$130.5mn. Synergies for Tech Mahindra: Healthcare and Life sciences has been one of the focus areas for Tech Mahindra globally and the acquisition will help in consolidating its position. Healthcare is one of the few sectors globally that is driving adoption of digital technologies. The acquisition will not only position Tech Mahindra as a significant player in the healthcare provider space, but will also provide an opportunity to go deeper in this space via EMR implementation and surrounding services route. The acquisition aligns with Tech Mahindra’s “DAVID” (digital, automation, verticalization, innovation and disruption) strategy where ‘Digitalization’ is one of the five main pillars of its growth strategy.

90

70 Feb-16

Recommendation: Buy

FY18E 18.9 41.4 53.0 12.1 2.1 6.4 12.0 18.2 16.6

Inorganic initiatives should be used to fill up gaps in technology; maintain Buy: TechM has used acquisitions smartly in the past five years to diversify/grow its revenue base and maintain its leadership position/skills in the telecom vertical. By and large, acquisitions have been integrated well by the company. However, acquisitions in the past couple of years have been faster and not all of them were best strategic fits. We like TechM’s leadership in the telecom vertical and like it’s positioning in the enterprise business vertical. Valuation & Outlook: Deal valuation is reasonable. The acquisition size of CJS Solutions is small (would increase TECHM FY18E revenues by just ~2.5%), in comparison to the recent (2014) acquisitions – LCC (Revenue run-rate of US$420mn, consideration of US$240mn, P/S of 0.6x), HGS (US$169mn, US$87.1mn, 0.5x), Comviva (US$70mn, US$95mn, 1.4x) and MESL (US$40mn, US$95.8mn, 2.2x). Multiples can re-rate if the company improves working capital management, ensuring solid FCF generation. We are not changing our estimates, but are confident about the business prospects of TECHM. Valuations are inexpensive and risk reward is attractive. We retain our BUY rating on the stock.

Tech Mahindra

Company Update

7 March 2017

Financials Income Statement (` mn) Year End-March Revenues Op. Expenses EBITDA

Balance Sheet (` mn) FY15

FY16

FY17E

FY18E

FY19E

Year End-March

FY15

FY16

FY17E

FY18E

FY19E

224,779 264,942 293,853 329,039 366,213

Equity Share Capital

4,804

4,839

4,870

4,890

4,910

183,635 222,235 249,390 276,466 307,291

Reserves & Surplus

129,989 151,142 174,410 202,340 233,511

Total Shareholders Fund

134,793 155,981 179,280 207,230 238,421

41,144

42,707

44,463

52,573

58,923

Other Income

1,006

5,015

6,797

6,100

6,550

Depreciation

6,079

7,589

9,436

10,238

11,443

36,071

40,133

41,825

48,435

54,030

EBIT Interest PBT

Minority Interest

1,601

2,020

2,020

2,020

2,020

Non- current liabilities

1,100

1,934

2,542

3,209

3,969

Long term Borrowings

460

1,967

1,967

1,967

1,967

Deferred tax liabilities

(3,901)

(5,575)

(5,575)

(5,575)

(5,575)

297

970

1,287

976

750

35,774

39,163

40,538

47,459

53,280

Current Liabilities

Other LT liabilities & prov

Tax

9,472

8,183

9,611

11,390

12,787

Short-term borrowings

PAT

26,302

30,979

30,927

36,068

40,493

Trade payables

(24)

26

(229)

444

444

Minority Adj Pat

26,278

31,006

30,675

36,512

40,937

Other cur liabilities & Prov Total Liabilities

4,541

5,542

6,149

6,817

7,577

57,086

69,560

76,381

83,799

92,244

6,286

8,055

8,055

8,055

8,055

20,587

22,755

25,281

28,025

31,150

30,213

38,750

43,045

47,719

53,039

194,580 229,495 260,222 296,258 336,654

Assets

Key Parameters Year End-March

FY15

FY16

FY17E

FY18E

FY19E

Per share (`) EPS

30.1

35.6

35.0

41.4

46.2

CEPS

37.1

44.3

45.7

53.0

59.1

BVPS

155.9

178.9

204.5

235.5

269.8

6.0

12.0

6.5

7.5

8.5

25.9

43.4

24.1

23.5

23.9

DPS Payout (%) Valuation (x) P/E

Non- current Assets

72,054

80,044

83,903

88,168

92,562

Fixed assets

27,717

32,383

34,383

36,383

38,383

Non-current investments

31,276

30,601

30,601

30,601

30,601

Long-term loans & adv

12,755

16,766

18,517

20,734

23,076

306

294

403

451

502

Other non-current assets Current assets Current investments

8,041

11,690

11,690

11,690

11,690

52,059

57,705

64,406

72,118

80,266

245

414

483

541

602

Cash & bank balances

24,049

40,138

56,266

75,061

97,355

Short-term loans & adv

18,728

17,084

19,322

21,635

24,080

Other current assets

19,404

22,420

24,152

27,044

30,100

Trade receivables Inventories

21.1

13.3

14.3

12.1

10.8

4.1

2.6

2.4

2.1

1.8

12.0

8.0

8.0

6.4

5.5

1.4

2.9

1.3

1.5

1.7

EBIDTA Margin

18.3

16.4

15.1

16.0

16.1

PBT

PAT Margin

11.7

11.9

10.5

11.0

11.1

Depreciation

ROAE

21.8

21.4

18.3

18.9

18.3

ROACE

28.1

26.4

23.4

24.0

23.5

P/BV EV/EBITDA Dividend Yield (%) Return ratio (%)

Long Term D/E

0.0

0.0

0.0

0.0

0.0

Net Debt/Equity

(0.3)

(0.3)

(0.4)

(0.4)

(0.4)

0.1

0.0

0.0

0.0

0.0

121.5

47.1

32.5

49.6

72.0

2.1

2.1

2.3

2.5

2.6

Debt/EBITDA Interest Coverage Current ratio

Total Assets

Growth Ratios (%)

FY15

FY16

FY17E

FY18E

FY19E

35,774

40,167

40,538

47,459

53,280

6,008

5,946

9,436

10,238

11,443

Interest Exp

297

871

1,287

976

750

Others

(24)

(387)

(252)

444

444

CF before W.cap

42,055

46,597

51,008

59,117

65,917

Inc/dec in W.cap

22,374

(519)

5,171

7,155

6,897

Op CF after W.cap

19,681

47,117

45,838

51,962

59,020

Less Taxes

9,472

8,600

9,611

11,390

12,787

Net CF From Operations

10,209

38,517

36,227

40,572

46,233

Inc/(dec) in F.A + CWIP

11,675

12,286

11,436

12,238

13,443

(Pur)/sale of Investments

18,113

2,974

-

-

-

(297)

(871)

(1,287)

(976)

(750)

Others

Income growth

19.4

17.9

10.9

12.0

11.3

CF from Invst Activities

EBITDA growth

(1.7)

5.3

4.1

18.2

12.1

Loan Raised/(repaid)

12.3

Equity Raised

PAT growth

(10.6)

20.0

(0.2)

16.6

Dividend

Turnover Ratios

194,580 229,495 260,222 296,258 336,654

Cash flow Statement Year End-March

Leverage Ratios (x)

122,526 149,451 176,319 208,090 244,092

(30,085) (16,130) (12,723) (13,214) (14,193) 6,222

3,276

-

-

-

11,299

3,939

31

20

20

6,745

13,513

7,407

8,582

9,766

CF from Fin Activities

10,776

(6,298)

(7,376)

(8,562)

(9,746)

F.A Turnover x

7.8

8.2

8.5

9.0

9.5

Net inc /(dec) in cash

(9,100)

16,089

16,128

18,796

22,294

Debtors Days

92

86

84

85

84

Op. bal of cash

33,202

24,049

40,138

56,266

75,061

Payable days

46

41

39

39

39

Cl. balance of cash

24,049

40,138

56,266

75,061

97,355

2

Tech Mahindra

Company Update

7 March 2017

Institutional Equity Team Names

Designation

Naren Shah

Sectors

Email ID's

Desk-Number

Head Of Equity

[email protected]stgroup.in

+91-22-4084-5074

Sriram Rangarajan

Sales

[email protected]

+91-22-4224-5216

Vivek Kumar

Sales

[email protected]

+91-22-4224-5197

Rajesh Ashar

Sales Trader

[email protected]

+91-22-4224-5123

Nikhil Shah

Dealer

[email protected]

+91-22-4084-5089

[email protected]

+91-22-4084-5089

Institutional Sales

Sales Trading & Dealing

Dealing Desk Research Team Binyam Taddese

Analyst

Rates & Credit Research

[email protected]

+91-22-4224-5037

Naushil Shah

Analyst

Technology, Media & Telecom

[email protected]

+91-22-4224-5125

Ritu Chaudhary

Associate

FMCG & Consumer Durable

[email protected]

+91-22-4224-5183

DISCLAIMER We are committed to providing completely independent and transparent recommendations to help our clients reach a better decision. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. The intent of this document is not in recommendary nature. The recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Trust Financial Consultancy Services Pvt. Ltd. has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval. Trust Financial Consultancy Services Pvt. Ltd., its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of Trust Financial Consultancy Services Pvt. Ltd. The views expressed are those of analyst and the Company may or may not subscribe to all the views expressed therein. Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. Copyright in this document vests exclusively with Trust Financial Consultancy Services Pvt. Ltd.

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