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Tech Mahindra: Is it worth a buy?
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August 28, 2006

Tech Mahindra listed at Rs 525 on BSE against an issue price of Rs 365. What should investors do with the stock and what are the concerns going forward?

Dipan Mehta, Member BSE & NSE, R Ravi of Karvy Stock Broking, Girish Nadkarni of IL&FS Investmart, Sajiv Dhawan of JV Capital Services and Sharmila Joshi of Asit C Mehta Securities give their views.

Dipan Mehta, Member BSE & NSE:

Buy Tech Mahindra over next few weeks or months

Mehta believes that it appears to be possible for Tech Mahindra to do anywhere between Rs 35-40/share for the current year.

Telecom space very attractive

It can easily trade in the range of 20-25 times on a trailing basis and I say this on account of the fact that the space in which Tech Mahindra operates, which is the telecom space, is very attractive.

There is not much of choice for investors who want an exposure to a company focused completely on the telecom space like Tech Mahindra.

It is among the fastest growing vertical within the software industry and on the whole, there is not much of choice for investors who want an exposure to a company focused completely on the telecom space like Tech Mahindra. Also, they encompass the entire range of technology services offered to the telecom group.

Ideal strategy is to spread purchases over next few weeks or months

I'm comfortable buying at 20 odd times but in this market and from the experience we have gained over the past few listings, I think it is better to spread out the buying over several months rather than buying entirely on the first day.

I think the ideal strategy would be to spread the purchases over the next few weeks or months. That way, one has more advantage of having more information as well, on the company and the average price also would help because one has bought it at various price points.

I think if it gets significantly overvalued, compared to the likes of Infosys, Wipro, Satyam or if there were any threats to the earnings, then one has to look at that option.

R Ravi of Karvy Stock Broking:

Tech Mahindra to post an EPS of Rs 33-35 for FY07

Ravi expects Tech Mahindra to post an EPS of Rs 33-35 for FY07. Ravi believes the company's dependence on British Telecom and lower margins despite high offshore share are huge negatives.

Operating margin less than 25%

My expectation is that the EPS at the end of the day should be between Rs 33-Rs 35 for FY07. But there are a few concerns that I would like to highlight. The primary concern is that you cannot have high offshore-centric revenues of around close to 70% and yet have an operating margin of less than 25%, there is a disconnect that exists.'

British Telecom accounts for close to 3/4th of revenues

British Telecom is a shareholder in the company. British Telecom still continues to account for close to 3/4th of the revenues.

No doubt, Tech Mahindra has a capability to increase revenues from US and from non-British Telecom clients. But for whatever reason, if British Telecom does sort of scale down, then definitely we have a problem on hand. So these concerns exist against a backdrop of an EPS of Rs 35.

Stock in euphoric state on listing day

If one looks tier II companies and juxtapose vis-a-vis Hexaware, Mphasis, Polaris and all others, all of them are trading between 14-17 times.

Here is a company, which is new and which is also trading at the same band, where is the upside for the investor? Why should the investor buy a company, which will not give significant upside from the current levels?

No doubt, the IPO was very attractively priced and as a result we have seen phenomenal appreciation on the first day but we also have to keep in mind that today is a day of euphoria for the stock.

Buy at Rs 450 levels

I think once people start coming and selling, the stock may come down to Rs 450 levels and that is the time I would reckon for the long term investor to enter. Today, if one enters, I don't think one will make any big money.

On the contrary, one would see a slippage in the stock price or the company should get a very large order in the very near future, which seems highly unlikely.

It is very clearly stated that around Rs 450 levels, it will become attractive. Because by that time, we will have full understanding of FY07 numbers. They would have reported two more extra quarters and we will be able to know as to how they will be able to scale up their new clients.

In the last one year, they have just added 16 new clients whereas there are companies with Tier I adding roughly 10-12 clients per quarter, so one is not adding clients at that brisk pace.'

Dependence only on telecom vertical

This company is only focussed on telecom vertical. So for whatever reason, if the telecom vertical does go through certain amount of languish in US, the exposure to one vertical has a higher risk. We have seen in the past, in 2001-2002, that if an economy goes through a weak phase, then verticals like telecom and technology are the worst hit.

They don't increase their budgets immediately and companies with exposure to telecom verticals suffer the most. So I would prefer a company where telecom accounts for one-fifth of the revenues because that gives an increase to billing rates whereas manufacturing and BFS give revenues visibility.

Girish Nadkarni of IL&FS Investmart:

Some weakness expected in next few days

Nadkarni believes that at 15-16 times earnings, Tech Mahindra is a hold. He recommends a 'buy' for Tech Mahindra on declines as he expects some weakness in the next few days.

Tech Mahindra at Rs 560 certainly not a sell

In terms of expectations, Rs 560 is about 15-17 times the expected FY07 earnings and the concerns, in terms of dependence on a single client is valid. So in absolute terms in the current market, where they are outsourcing all software services, it is likely to continue to grow quite well.

At 15-16 times earnings, Tech Mahindra at Rs 560 is certainly not a sell. I would think it definitely merits a hold at current prices and one needs to look at the subsequent quarters in terms of ensuring that the company's numbers are on track.

At Rs 450, valuation very attractive

If it does come down to Rs 450, it becomes a very attractive valuation. At Rs 325, the IPO was priced extremely attractively, which is why we saw the phenomenal response that the company got, apart from the fact that it is a well established player, a well known name amongst the investors.

All these factors contributed to the success of the IPO. The price of Rs 560 also is a function of the success of the IPO itself. So on every downside, it will become more attractive. I would think at Rs 560, it definitely merits a 'hold', certainly not a 'sell'.

Sajiv Dhawan of JV Capital Services:

Tech Mahindra to consolidate at Rs 500

Dhawan believes that Tech Mahindra, over a medium term outlook of at least six months will perform very well. Dhawan said that the Tech Mahindra stock may consolidate around Rs 500 levels.

He further said, 'If the stock does drift down for any reason, I think it will be a reasonable opportunity for investors to either add to their existing holdings or come in. But again with a longer timeframe, because I think it is one stock over the medium term outlook with at least six months, which is likely to perform very well in the markets.'

Sharmila Joshi of Asit C Mehta Securities:

Sell partially and retain some for future gains

Joshi says, Tech Mahindra is one good IT IPO, which the market has seen after a long time. Joshi feels that if one has the stock, then one should partially sell it and keep some for possible future gains because their business model is quite strong.

Rs 560 is a bit of problem

I think this Rs 560 is a bit of problem otherwise the company is great and one expected it to open with an upside. After a long time, the market has seen a good IT IPO and one wants to value it as a tier I type company. But Rs 560 would mean that one is already valuing it at a P/E of 25.

Overall, I think it is a good issue and we have often seen that the issues, which are in the fancied sector, probably see a good run over and above the kind of listing price they get otherwise.

Sometimes, it is better to sell-off on the first day. So if one has the stock, then one should partially sell it and keep some for possible future gains because their business model is obviously quite strong.

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