Buy Tech Mahindra with target price of 1770 - Goldman Sachs

Buy Tech Mahindra with target price of 1770 - Goldman Sachs

Source of opportunity 
We add Tech Mahindra (Buy) to our regional Conviction List and raise our 12-month Director’s Cut-based target price to Rs1,770, implying 34% potential upside. We believe that since its merger with Satyam made it the fifth largest Indian IT services firm, TechM has gained adequate scale and capabilities to: (1) win large tickets deals through its position in the telecom vertical (the single largest offshore vendor globally) and ERP expertise in non-telecom verticals, (2) cross sell services across verticals as it has
minimal client overlap (2%). With six wins in past six months, it has begun
demonstrating the ability to win large deals, which is a key stock driver. 

Catalyst 
We believe that TechM’s revenue momentum will pick up over the next few
quarters as it executes the deal wins. We forecast 13%/30% US$ revenue/EPS
CAGR over FY13-FY15E driven by increased deal wins and (1) better utilization
levels, (2) improved fresher ratio and (3) INR tailwinds helping expand margins
over the next 2 years. We are 10%-15% above Bloomberg consensus on
EPS over FY14E-FY15E.

Key catalysts: 
(1) Announcement of large deal wins over the next 6 months (4 deals in the pipeline)
(2) Successful execution of large deals (like KPN-BASE) by FY15, leading to consensus upgrades. 

Key risks 
(1) Loss of BT contract
(2) unfavorable decision on pending court cases (downside risk of Rs84/share)
(3) Significant appreciation in INR. 

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Happy Investing!!!