Should you invest in Tech Mahindra?

The Rs 450 crore (Rs 4.5 billion) Tech Mahindra IPO has opened on Tuesday. Phani Sekhar of Angel Stock Broking and Deepak Jasani of HDFC Securities give their views on the Tech Mahindra IPO.

Phani Sekhar of Angel Stock Broking feels that investors should subscribe to Tech Mahindra's IPO since it is it is one of the few large IT companies, which has been out of public domain. He also says that the company's off-shoring is the highest in the industry at 68 per cent and thus it scores over the big four in the IT industry.

Deepak Jasani of HDFC Securities believes that Tech Mahindra IPO is worth subscribing as it is attractively priced.

Excerpts from CNBC - TV18's exclusive interview with Phani Sekhar and Deepak Jasani of HDFC Securities:

Tech Mahindra- What is it for you, a subscribe or a skip and why?

Sekhar: We are advising our investors to subscribe to the issue primarily because it is one of the few large IT companies, which have been out of the public domain and also because it is a leader in its niche domain.

How do you compare the working of this company with the big four at the moment?

Sekhar: It is actually a bit difficult to compare it on a one-on-one basis with the big four because they have a fairly diversified business model as compared to Tech Mahindra. But one of the salient features of Tech Mahindra is that their off-shoring is the highest in the industry at 68% and in that way it scores over the big four. But on a business model scale, the big four have a clear edge.

What kind of valuation would you give Tech Mahindra as compared to Infosys Technologies or Wipro?

Sekhar: I would be comfortable with at least 50% discount to Infosys Technologies or Wipro.

Do you like the issue and on a valuation basis, where would you peg it at, on an expanded equity?

Jasani: We feel that the issue is worth subscribing to; there are two or three reasons for it. One is that it is quite attractively priced as compared to the issues that we have seen over the last few months.

We expect the company to end up with earnings of about Rs 29 in FY07 and going by that, the P/E ratio for FY07 works out to about 11-12.5 times, which is neither very cheap nor expensive. They leave something on the table for the investor.

Any concerns on this one because there have been analyst reports on the point that there is high dependence on one client and there are also very high attrition rates for the company?

Sekhar: Definitely, high attrition rates is a concern. Because of the deep expertise in the telecom domain, they have become a favourite poaching zone for the rest of the companies.

The client concentration is expected to be high since they are operating in a niche domain. The main concern that I have, apart from client concentration, is that off-shoring. Today it stands at about 68% and I do not think that they have any significant headroom to expand on that. That will, in turn, mean that an important margin lever has got exhausted.

Any concerns on their over-dependence on telecom and BT (British Telecommunications)?

Jasani: Yes, those concerns are there and that is the reason that it is available at these valuations. On the other hand, volume growth would compensate for the lack of margin expansion.

You said 11-12 times at the moment. How would you compare it with Satyam Computer Services, TCS, Wipro and Infosys etc, what kind of valuation would you give to these four companies?

Jasani: In a normalized market, it could get a valuation of between 14-16 times.

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