ANALYSIS BEYOND CONSENSUS

THE NEW ABC OF RESEARCH

Tech Mahindra | Annual Report Analysis

Tech Mahindras (TML) FY15 annual report analysis

highlights
significant
jump
in unbilled
revenue to 8.6% of sales (FY14: 5.7%)
peers.
cost surged from 9.1% of sales in FY14 to
highestSub-contracting
amongst
12.5%
in
FY15, leading to decline in EBITDA margin. ESOP cost rose
1.8x fromin FY14 to INR2.3bn in FY15. TMLs receivables,
INR1.3bn
unbilled
revenue
and payable
days are highest amongst peers. Earning
conversion
ratio improved in FY15, albeit it is the lowest
to cash flow
FY15
net peers.
worth rose by INR2.1bn on account of merger of
amongst
Mahindra
Engineering Services (MESL) as per pooling of interest method
akin
to the
merger
of Mahindra Satyam and other associates in FY14. In our

estimate,
had
the
company
followed
the
purchase
accounting
method
net worth would have been higher by INR39.0bn on the above 2 Promoters*
MFs, FIs & Banks
mergers
would be lower from reported 28%/36% to 20%/26%, respectively
:
FIIs
(15%/22% including goodwill amortisation). TML paid INR12.7bn for
:
Others
acquisitions during FY15, largely towards goodwill.
:

*Promoters pledged shares

(% of share in issue)

Whats on track?
Revenue
grew a healthy 20% in FY15 (organic growth 17% YoY). Dollar revenue jumped 19% YoY to USD3.7bn (organic growth 16%)

Consequently, adjusted RoE/ RoCE (without goodwill amortisation impact)

NSUS
Market Data
52-week range (INR)
:
Share in issue (mn)
: (INR bn/USD mn)
M cap

749 / 458
961.5
459 / 7,229

:
Avg. Daily Vol. BSE/NSE
(000) :

ase

2,997.9

Shareholding Pattern
(%)

accounting
Promoters*

26%, respectively
aid INR12.7bn for

method. 36.7
:

MFs, FIs & Banks

34.2

FIIs
Others

*Promoters pledged shares

in issue)

13.9
15.2
: Nil

9% YoY to USD3.7bn (organic growth 16%).What needs tracking?

Unbilled revenue surged to INR19.4bn, 8.6% of sales (FY14: INR10.7bn, 5.7

isation impact)

ESOP cost rose from INR1.3bn to INR2.3bn YoY (largely to key management personnel). TML
accounted ESOPs on intrinsic value, as permitted by SEBIs ESOP regulations. Had the company follo
1.5% of PAT (FY14: INR254mn, 0.8%).
Derivatives exposure rose to INR103.6bn, 46% of revenue (FY14: INR62.8bn, 33%), and TML
clocked forex gain of INR6.3bn in hedging reserve. Forex loss in P&L stood at INR2.2bn in FY15 (FY14: INR2.1
Contingent liabilities rose from INR48.1bn in FY14 (60% of net worth) to INR73.1bn (66%) in
FY15 and largely included guarantees, disputed income tax and service tax liabilities. Major increase in FY15
we believe could pertain to erstwhile Satyam Computers.
TML has given premises on operating lease (including long term lease of Land for
Engineering College), for which it receives rent (FY15: INR212mn). Amount receivable in
FY16 is INR283mn and rental receivable after 5 years stands at INR11.0bn, implying average useful life of 39

Profitability analysis
Table 1: Profitability analysis
Source: Company annual report, Edelweiss research

Though revenue jumped 20% YoY, previous years numbers are not comparable due to
acquisitions made by TML during the year. FY15 revenue, in USD terms, grew 19% YoY to
USD3,686mn and included USD100mn from LLC and Softgen (excluding acquisitions, USD revenue gre
Particulars

Standalone

Subsidiary/ JV (Derived)

FY14
%
FY1
%
FY14
%
FY15
Sales
###
191.6
100.0 25.4 ###
34.6
5
Subcontracting
expenses
34.0
20.9
64.2
33.5
(16.9)
163.0
(35.8)
(103.6)
17.1
Operating
and Administrative
23.6
14.5
23.2
12.1 8.4
33.1
14.0
expense
Personnel cost
69.7
42.8
72.0
37.6 27.6 ###
47.1
EBITDA
35.6
21.9
32.3
16.8
Depreciation
4.3
2.6
2.5 1.0
3.8
1.4
26.8
41.8
22.2
41.5
18.4 4.7
EBIT
31.3
19.2
27.5
14.4 5.3
20.8
7.9
Financial Charges
0.9
0.5
0.1
0.0 (0.1) (0.3)
0.2
Other income
0.7
0.4
1.2
0.6 0.4
1.7
(0.2)
PBT before exceptional
31.2
19.1
28.7
15.0 5.8
22.7
7.5
items

Consolidated

% FY14
100.0 188.3
(66.6)
40.6
32.0
136.3 97.4
6.2
24.5
### 5.2
22.8 36.6
### 0.8
(0.5)
1.1
21.7 36.9

9.3

Edelweiss Secur

ad the company followed the fair value method, net profit would have be lower by INR398mn,

n in FY15 (FY14: INR2.1bn).

Major increase in FY15 includes INR12.8bn relating to service tax matters for 2008 to 2013, which
Land for

verage useful life of 39 years.

(INR bn)

ons, USD revenue grew 16% YoY).

Consolidated

% FY15
%
100.0
226.2 100.0
9.1
28.3
17.0 12.537.2
16.4
51.7
24.5

2.8
19.4
0.4
0.6
19.6

119.1
9.3
6.1
35.4
0.3
1.1
36.2

52.7
2.7
15.7
0.1
0.5
16.0

Edelweiss Securities Limited

Particulars
Subcontracting expenses
Revenues
Subcontracting as % of
revenues
TML and HCL Tech have the
highest sub-contracting cost
compared to peers
Unbilled revenue surged during
FY15 to 8.6% of sales from 5.7%
in FY14

FY13
6,615
68,731
9.6

Table 2: Sub-contracting cost

FY14
17,114
188,314
9.1

FY15
28,343
226,213
12.5

(INR mn)

Source: Company annual report, Edelweiss research

Table 3: Peer comparison

(%)
Particulars
FY13
FY14
FY1
Tech Mahindra
9.1
9.6
12.5
Infosys
3.6
3.9
4.1
TCS
6.0
6.0
6.6
HCL Tech (December year end)
11.1
Source:
11.5Company annual report, Edelweiss research
13.1
FY15 saw significant increase in sub-contracting cost at 12.5% of revenue, leading to EBITDA
margin contraction YoY from 22.2% to 18.4%.
Table 4: Unbilled revenue
(INR mn)
Source: Company annual report, Edelweiss research

Other highlights:
TML incurred INR6.6bn, 3% of revenue in FY15 (FY14: INR5.6bn, 3%), on software, hardware and project spe
contract and are accounted on gross basis.
Employee cost included ESOP cost, which rose from INR1.3bn to INR2.3bn YoY (largely to
key management personnel). TML accounted ESOPs on intrinsic value, as permitted by
SEBIs ESOP regulations. Had the company followed the fair value method, net profit would have been lower

Particulars
Unbilled revenue
% of revenue
Unearned revenue
% of revenue

FY1
2
###
3.9
153
0.3

FY13
2,376
3.5
117
0.2
3

FY14
10,709
5.7
1,421
0.8

FY15
19,425
8.6
1,260
0.6

(INR mn)

FY14

6.0

(%)
FY15

6.6

e, leading to EBITDA
(INR mn)

software, hardware and project specific expenses. These costs are reimbursed by the customers as part of

NR2.3bn YoY (largely to

ue, as permitted by
d, net profit would have been lower by INR398mn, 1.5% of PAT (FY14: INR254mn, 0.8%).

Edelweiss Securities Limited

customers as part of

Cash flow analysis and earnings to c

Table 5: Cash flow analysis
Particulars
Subsidiary (derived)
Consolidated
FY14
FY15
Profit before tax
Non-operating expense
Non-cash adjustments
Direct taxes paid
Cash profit after tax

Standalone

FY14

FY15

FY14
28.7

31.2
(0.3)
5.4
(8.8)

0.0
5.5
(6.8)
27.5

(Increase)/Decrease in trade and other receivables

(18.7)

Increase/(Decrease) in Trade payables

Increase/(Decrease) in other liabilities & provisions
(derived)
Increase in working capital
Net cash from operating activities
Interest expenses paid
Net cash from operating activities post
interest
Less: Capex
Less: Cash paid for acquisitions
Less: Additional investment in subsidiaries (net)
Adjusted free cash flow

6.1

FY15
5.8

(1.9)

7.5

0.3
0.8
(2.2)
27.4

0.1
1.5
(4.0)
4.7

0.0
6.2
(10.9)
5.1

(8.9)

(1.7)

0.3

(20.4)

4.2

(2.1)

1.5

3.9

(2.1)

2.2

(3.6)

0.3

(14.5)
12.9
(1.0)
11.9
(7.7)
(1.1)
3.1

(6.8)
20.7
(0.4)
20.3
(9.0)
(1.5)
(11.4)
(1.6)

(1.6)
3.0
0.1
3.1
(1.5)
(0.4)
0.5
1.8

(1.7)
3.4
(0.3)
3.1
(2.1)
(11.2)
10.3
0.1

Source: Company annual report, Edelweiss research

Operating cash flow (OCF), post interest improved YoY from INR15.0bn to INR23.4bn
primarily led by lower working capital investment YoY. Receivables grew by INR8.5bn in FY15 versus I
provisions (primarily led by reduction in liability towards derivatives contracts).
Free cash flows adjusted for capex, acquisitions and incremental investment in subsidiaries
declined from INR5.0bn in FY14 to INR(1.4)bn in FY15.
Table 6: Cash conversion cycle Peer comparison (days)*

Particulars
Trade receivable days
Unbilled revenue days
Inventory days
Advance from customer/unearned
days
##
#
Trade payable days
(5)
(7)
(88)
(40)
(19)
Supplier credit days
20
34
Conversion
cycle

T
FY1 MFY15
L
4
84
88
21
31
(5)

Inf
FY14 os F
Y
61 ys
###
1
20
###
5 (3)

(11)

T
FY14C FY15
81 S
79
18
15
-

(8)

(5)

(5)

(10)

(1)

reve

(94)

66

70

* Conversion cycle is calculated on closing ba

Unbilled revenue rose significantly in FY15 from 21 to 31 days and payable days rose to 109
in FY15, partly led by acquisitions. Receivables, unbilled and payable days are the highest for TML amongst p
During FY15, TML for the first time started availing the bill discounting facility and amount
outstanding as at FY15 stood at INR2.7bn. Receivable days calculated above are adjusted for bills discounted

Amounts outstanding towards

bills discounting facility stood
at INR2.7bn (FY14: Nil)

Edelweiss Securit

and earnings to cash conversion

(INR bn)

36.9
0.0
6.2
(10.9)

36.2
0.1
7.0
(10.7)

32.1
(20.4)

32.6
(8.5)

3.9

5.7

0.3

(5.7)
(16.1)
16.0
(1.0)
15.0
(9.1)
(0.4)
(0.5)
5.0

(8.5)
24.1
(0.6)
23.4
(11.1)
(12.7)
(1.1)
(1.4)

.5bn in FY15 versus INR20.4bn in FY14. The rise in payables was offset by fall in other liabilities and

(5)

(10)

HC
L
CY13
CY1
4
64 Tec
65
24 h
23
13
5
revenue
(1)

66

70

71

108

calculated on closing basis for like to like comparison between peers.

Source: Company annual report, Edelweiss research

est for TML amongst peers.

ed for bills discounted.

Edelweiss Securities Limited

Unprovided receivables more

than 6 months rose to INR2.6bn
in FY15

Total receivables rose from INR43.5bn in FY14 to INR52.1bn in FY15 and unbilled revenue
rose from INR10.7bn to INR19.4bn over the same period.
Payables catapulted from INR9.5bn in FY14 to INR15.2bn in FY15 of which INR3.5bn was led
by acquisitions.
Table 6: Receivables analysis
Source: Company annual report, Edelweiss research

Receivables more than 6 months and 1 year stood higher at INR9.6bn. However, the
company has already provided INR7.0bn towards doubtful receivables.
Table 7: Earnings to cash conversion analysis
Source: Company annual report, Edelweiss research

Chart 1: Earnings to cash conversion ratio

###
Particulars
Receivables > 1 year
Receivables > 6 months
Total
Less: Provision for doubtful
receivables
Net receivables >6 months
Others
Total

FY13
151
1,787
1,938
(820)
1,118
15,918
17,036

Particulars
Operating cash flow post interest (A)
Profit after tax (PAT)
Depreciation
Other income
PAT + Depreciation - Other income (B)
Earnings to cash conversion ratio (A/B*100)

FY14
3,604
5,330
8,934
(6,965)
1,969
41,517
43,486
FY11
7,715
6,442
1,435
1,288
6,589
117

FY12
6,206
10,955
1,613
982
11,586
54

FY15
3,343
6,292
9,635
(6,990)
2,645
49,414
52,059
FY13
14,988
12,878
2,000
(747)
15,625
96

(INR mn)

##
###
###
###
###
FY11

FY12
FY13
FY14
Earnings to cash conversion ratio (A/B*100)

FY15

Source: Company annual report, Edelweiss research

5

Edelweiss Secur

(INR mn)

wever, the
(INR mn)

FY14
14,988
30,288
5,222
1,130
34,380
44

FY15
23,448
26,277
6,114
1,065
31,326
75

Edelweiss Securities Limited

Table 8: Earning to cash flow conversion ratioTML versus peers

TML
Infosys
TCS
HCL tech
Particulars
FY14
FY15
FY14
FY15
FY14
Operating cash flow post interest (A)
15.0
23.4
98.3
83.5
147.1
Profit after tax (PAT)
30.3
26.3
106.6
123.7
191.6
Depreciation
5.2
6.1
13.2
10.2
13.5
Other income
1.1
1.1
26.6
34.3
16.4
PAT + Depreciation - Other income
34.4
31.3
93.1
99.6
188.8
(B)
Earnings to cash conversion ratio
44
75
106
84
78
Source: Company annual report, Edelweiss research
(A/B*100)
Earning to cash flow conversion ratio improved in FY15, although it remains low vis--vis
peers.

Merger accounting
During FY15, TML merged Mahindra Engineering Services (MESL) with itself and issued 5 shares for
method and led to increase in net worth by INR2.1bn.
Table9:MESLmergerIncreaseinnetworthifshareswereissuedatmarketprice

Net worth stood lower by

INR39.0bn due to merger as per
pooling of interest method

Particulars

No of shares

INR mn
(mn)
Shares issued to acquire Mahindra Engineering Services Ltd.
##
43
Net worth increased on account of merger as per
2,058
pooling
of
Total
increase
in net worth (A)
2,101
Value of 4.26mn shares issued on merger at 1 month
6,975
average

Increase in net worth had the company issued shares

at market price or followed purchase method of
accounting
(B-A)
Source: Company annual report, BSE, Edelweiss research

4,874

Had the company followed the purchase method of accounting, FY15 net worth would have been hig
Table10:MahindraSatyammergerapprovedinFY14
No of shares
Particulars

INR mn
(mn)
Cash paid for acquiring 42.6% stake in FY10 (A)
29,695
Value of 79.4mn shares issued on merger at 1 month
##48,184
average price of INR606.8 each pre-merger (B)
Total cost of investment in Mahindra Satyam (A+B)
77,879
Net worth increased on account of merger as per pooling of
14,096
interest method (C)
Increase in net worth had the company issued shares
34,088
at market price or followed purchase method of
accounting
(B-C)
Source: Company
annual report, BSE, Edelweiss research
In FY14, the company had merged Mahindra Satyam and other subsidiaries/ associates with
itself which led to increase in net worth by INR16.8bn (INR14.1bn pertaining to Mahindra Satyam).
6

Edelweiss Secur

(INR bn)
FY15
192.6
198.5
18.0
32.3
184.2
105

FY13
44.2
40.4
6.4
3.5
43.3
102

FY15
64.0
65.1
6.8
6.8
65.1
98

s low vis--vis

and issued 5 shares for every 12 shares of MESL in December 2014, aggregating to 4,259,011 shares (1.8%

rketprice

No of shares

(mn)

worth would have been higher by INR4.9bn.

No of shares

(mn)

ciates with
Mahindra Satyam).
Edelweiss Securities Limited

to 4,259,011 shares (1.8% of outstanding shares). The merger was accounted under the pooling of interest

pooling of interest

Adjusted for INR39.0bn

(without goodwill amortization),
ROE and ROCE are lower by 8%
and 10% respectively
Including goodwill amortisation
ROE/ROCE are lower by 13%
and 15% respectively

Cumulatively, net worth is lower by INR39.0bn due to merger accounting as per

aforementioned analysis. Consequently, RoE/ RoCE are higher as explained under:
Table 11: Adjusted RoE and RoCE (%)
Adjusted#
Before goodwill
Reported

After goodwill
amortisation
Particulars
ROE (%)
ROCE (%)
Book value per share
(INR)

amortisation

FY14
44
50
342

FY15
28
36
115

FY14
28
34
567

FY15
20
26
173

FY14
22
29
530

FY15
15
22
164

# Adjusted for treasury shares and net worth adjustment as per above Table
Source: Company annual report, Edelweiss research

As per AS 14, any goodwill arising on amalgamation is required to be amortised over a

period of 5 years. Book value is also understated to that extent.
Treasury shares
TML continues to hold 10% of equity in the form of treasury shares on merger of Mahindra Satyam. To that ex

Derivatives and forex losses/ gains

Table 12: Derivative exposure
Particulars
FY14
Notional amount
FY15
Fair value loss/ (gain)
FY14
FY15
FCY
GBP/EUR to USD contracts
Forward
(795)
EUR 30752
2,477
Total
27,384
756

EUR 155

GBP 157
10,464

(2,170)

INR
15,676
4
18,154

GBP 183
(1,375)

FCY

16,9

USD/ GBP/ EUR to INR contracts

Forward

USD 933

56,073
EUR 12
270
92

USD 1,470
991
60
103
4,748
USD 180
62,810
33

GBP 10
998
GBP 1
Options
USD 79
25
Total (77)
As % of revenues
Source:
Company annual report, Edelweiss research
46
Derivatives exposure rose significantly in FY15 to INR103.6bn, 46% of revenue, from
INR62.8bn in FY14.

92,0
EUR 4
(39)
(1)
11,

accounting as per

o be amortised over a

erger of Mahindra Satyam. To that extent, effective voting rights of minority shareholders are lower than the economic

ves and forex losses/ gains

(Figures in mn)

INR

76
4
18,154

GBP 183
(1,375)

FCY
16,920

INR

INR

INR

73

USD 1,470
991
60
103
748
USD 180
62,810
33

92,008
EUR 4
(39)
(1)
11,266

5,211

103,637

of revenue, from

Edelweiss Securities Limited

1,368

5,297

1,353

re lower than the economic interest.

Particulars
ChargedtoP&L
As a part of finance costs
AS a part of other income
Total
Add: Charged to Hedging reserve
(net)
Total forex losses/ (gain)

FY1
FY14
3
###
98.0
###
2,007.0
###
###
(1,049.0) 3,072.0
###
###

FY15
2,234.0
2,234.0
(6,294.0)
(4,060.0)

Table 13: Forex losses/ (gains)

(INR mn)

Source: Company annual report, Edelweiss research

Table 14: Hedging reserve movement

Particulars
Opening balance
Add: Loss/ (gain) for the year
Less: Loss/ (gain) transferred to P&L
Additions on amalgamation (net)
Closing balance [Loss/ (gain)]

(INR mn)
FY13
3,535.0 2,486.0
### 4,084.0
###
843.0
(169.0)
###
5,558.0

FY14
5,558.0
(6,294.0)
(736.0)

Source: Company annual report, Edelweiss research

Forex losses charged to P&L stood at INR2.2bn in FY15 and TML recorded forex gain of
INR6.3bn in hedging reserve.
Table 15: Contingent liabilities / claims
(INR mn)
Source: Company annual report, Edelweiss research

Particulars

FY14

FY15

FY1

Guarantees/ Letter of supports

Outstanding bill discounting
Income tax demands
Service tax and Sales Tax matters
Other claims not acknowledged as debt
Total
Net worth
% of net worth

16,492
28,209
2,140
1,212
48,053
79,749
60.3
8

22,170
2,697
30,548
16,506
1,228
73,149
110,418
66.2

(INR mn)
(INR mn)
FY14

FY15

ecorded forex gain of

(INR mn)

Edelweiss Securities Limited

Particulars
Sales
Total income
EBITDA
EBITDA margin (%)
RoCE (%)
RoE (%)
Depreciation
Financial costs
Net profit
Equity shareholders' funds*
Loan funds
Net Debt
Net fixed assets (Ex CWIP and goodwill on consolidation)
CWIP
Goodwill on consolidation
Current assets loans and advances
Current liabilities and provisions
Net current assets (ex-cash)
Cash and cash equivalent
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Net cash flows
CAPEX
Working capital (investments)/inflow
Table 16: Summary financials

FY11
FY12
51,402
54,897
52,690
55,879
10,034
9,194
19.5
16.7
22.4
17.6
20.7
31.0
1,435
1,613
1,113
1,026
6,442
10,955
33,514
40,509
12,227
11,266
9,183
7,243
6,137
6,792
608
1,671
33
33
17,246
18,019
9,278
11,235
7,968
6,784
3,044
4,023
4,637
7,117
(1,334)
(4,203)
(2,867)
(3,174)
436
(260)
(1,534)
(2,958)
(2,743)
226

FY13
68,731
67,984
14,242
20.7
19.2
27.2
2,000
1,030
12,878
54,256
13,804
6,701
9,039
343
3,407
23,809
16,377
7,432
7,103
9,597
(7,072)
(3,481)
(956)
(4,382)
3,195

* Adjusted for treasury shares

Source: Company annual report, Edelweiss research

Edelweiss Secu

FY
14
188,314
189,444
###
###
###
###
5,222
799
###
###
3,589
(32,085)
###
2,662
5,640
###
###
###
###
###
(1,896)
(9,723)
4,343
(9,138)
(16,148)

FY15
###
###
###
18.4
36.4
27.6
###
299
###
###
###
(25,252)
###
###
###
###
###
###
###
###
(20,922)
(7,898)
(4,733)
(11,132)
(8,498)

Edelweiss Securities Limited

(INR mn)

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.
Board: (91-22) 4009 4400, Email: [email protected]
Nirav Sheth
Head Research [email protected]
Date
Title
14Jul15

Crompton Greaves Annual Report Analysis

03Jul15

Zee Entertainment Enterprises - Annual Report Analysis 30Jun15

01Jun15

Ashok Leyland - Annual Report Analysis 01Jun15

Havells India - Annual Report Analysis

Reliance Industries - Annual Report Analysis 07May1

28 Feb15

Union Budget : Corporate tax There is more than meets the eye 06Feb15

12Dec14

HCL Technologies Annual Report Analysis

08 Dec 14
10Nov14
14 - Oct - 14

Mahindra & Mahindra Annual Report Analysis 04 Dec14

Dish TV India Annual Report Analysis 27Oct14
Motherson Sumi Annual Report Analysis
10

GST: A vital cog of `Make-in-India

Jubilant Foodworks Annual Report Analysis 1

Bharat Forge Annual Report Analysis 20Oct14

Ti

ai 400 098.

Havells India - Annual Report Analysis

ustries - Annual Report Analysis 07May15

eb15

ICDS - New Tax Computation Regime 21Apr15

GST: A vital cog of `Make-in-India wheel

lant Foodworks Annual Report Analysis 14 Nov14

Annual Report Analysis 20Oct14

Marico Annual Report Analysis

Titan Company Annual Report Analysis

Edelweiss Securities Limited

MAT on capital gains of FIIs Expert V

capital gains of FIIs Expert View 16Mar15

Eicher Motors Annual Report Analysis

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