Tech Mahindra Limited – Best Stock to buy in 2014
There were several requests on this blog to give some stock recommendations. Even, I have been thinking about stock recommendations on this blog, but could not do it earlier. Finally the day has come. Among IT companies, few of the IT players have been performing well. While TCS has been an evergreen player, one of the top performing technology company is Tech Mahindra Limited. Tech Mahindra is 5th largest IT Vendor listed in India. In this article, I would analyze about Tech Mahindra Limited, why to invest and risks involved.
Also Read: Tips to identify top blue chip stocks for investment for long term investment
About Tech Mahindra Limited
Tech Mahindra is the 5th largest IT vendor listed in India. Tech Mahindra revenues are at 18,831 Crores (Financial Year 2013-14) which have grown by 31% and profits are at Rs 3,029 Crores (grown by 55%) for financial year 2013-14. Tech Mahindra Limited major vertical is Telecom, which contributes to 47% of the company revenues. This division grew by 22% in the last financial year compared to previous years. Other divisions like manufacturing contributes to 19%, media and entertainment to 11%, BFSI 10%. In terms of geographical distribution of revenue, America is 45%, Europe, 30% and Rest of the world is 25%.
Why to invest in Tech Mahindra?
- The company has low revenues for the BFSI segment (10%). BFSI has been every green sector except during financial meltdown / slowdown few years back. Currently the company is focusing to increase revenues from this segment. Due to its focus on this segment, it was able to win large deals from Volvo, UBS etc.
- Company revenues grown by 31% in FY 2013-14 which is healthy growth in IT Sector.
- Profitability has grown by 55% in FY 2013-14 to Rs 3,029 Crores. Such increase in profits would benefit shareholders by way of dividends.
- The company has a desirable geographical mix and depends less than 45% in US Markets.
- Revenues from Australia markets are seeing a revival.
- The telecom sector has been on the slow growth path. With an expectation that Telecom players increase technology spending in coming years, this may help companies like Tech Mahindra where 47% of its revenue is from Telecom segment.
- Satyam acquisition has strengthened Tech Mahindra.
- Healthy 15 multi million dollar deals in the last few quarters
- Company acquisition of Hutchison Global Services and Comviva will help to strengthen telecom verticals.
- While US IT sector has reached its peak, Tech Mahindra has been doing well. This does not mean that you should invest in all stocks of IT Sector. It depends on companies who are performing well.
Why not to invest in Tech Mahindra?
- Revenues from Top-10 customers contribute to 50% of company revenues, which poses a high risk. Change in strategy by any one of the top customer can reduce the revenues.
- Utilization of software professionals stands at 72% in Q1, which is low in the industry. Low utilization means, there are software professionals in the company from whom the company incurs costs, but does not earn any revenues. An ideal utilization could be around 80%.
- US Markets reached peaks and future IT spending could slow down.
- Currently IT stocks in India are in defensive mode, though there is a stock market rally in India.
- While last year profits was good, Q1 FY 2014-15 profits are up only by 2.7%, while Q1 revenues are up by 18%
How is the Tech Mahindra Share price movement in the last 5 years?
Source: Moneycontrol.com
Also Read: What is P/E Ratio and how it would help you to pick good stocks?
Investment Strategy
- Currently Tech Mahindra is trading at Rs 2,187 (8-August-2014 share price) which is 16 times (P/E Ratio) its EPS of 2014-15 (Rs 131).
- Its competitors Tata Consultancy Services (TCS) is trading at Rs 2,476 (8-August-2014) which is 26 times (P/E Ratio) its EPS of Rs 94 (FY 2013-14).
- Its another competitor Infosys Technologies are trading at Rs 3,480 (8-August-2014) which is 18 times (P/E Ratio) its EPS of Rs 94 (FY 2013-14).
- Comparing to its peers, share price can move between 18 to 26 P/E Ratio.
- Considering good positive points and risk factors indicated above, one can invest in this stock for a time frame of 3 to 5 years to get good decent returns. During market corrections, the share price may dip and investors can grab such opportunity for buying at lower price levels.
Disclaimer: Personally, I have not invested in this stock as of now, but would buy any time from now. I am waiting for some correction to happen so that I would accumulate this stock at lower levels.
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Suresh
Tech Mahindra Limited – Best Stock to buy in 2014
HI Suresh,
What is your view at current prise. The article you written is 1.5 years back, you said will taking during corrections…
For long term please give your opinion…
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