Stock to buy - Tech Mahindra

Should you buy stocks of Tech Mahindra post merger approval news and if yes, for what stock price target?

Recently, Tech Mahindra (Tech M) and Mahindra Satyam (Satyam) merger has been approved with their wholly owned subsidiaries, Venturbay Consultants Pvt. Ltd., C&S System Technologies Pvt. Ltd., CanvasM Technologies Ltd. and Mahindra Logisoft Business Solutions Ltd. The swap ratio approved by the board of both the companies is 2:17, i.e., 2 shares of Tech M (face value of `10 each) for every 17 shares of Satyam (face value of `2 each). The merger process could take up to nine months to complete and will be effective from April 1, 2011.

Shareholding pattern:
Mahindra Group will own 26.3% in the combined entity, British Telecom (BT) will own 12.8%, 10.4% will be held as treasury stock, 34.4% will be held by public shareholders of Mahindra Satyam and the balance 16.1% will be held by public shareholders of Tech Mahindra. The intention of creating a treasury stock is to allow the company greater liquidity when needed. This, especially in the matter of acquisitions, is on the agenda of both the companies. Tech M will issue 10.34cr new shares, thereby increasing its outstanding shares to 23.08cr and its equity capital to `230.8cr.

Well-diversified revenue mix:
The combined entity will have a broad-based play across industries such as manufacturing, BFSI, telecom, technology, media and entertainment, retail, transport and logistics and lifesciences and healthcare.

Geographically, the revenue would be balanced between Americas at 42%, Europe at 35% and emerging markets at 23%. British Telecom is Tech M's biggest, revenue share from BT would come down to ~17%, while Tech M currently derives 35% of its revenue from BT. The combined entity would have 75,000 employees in 54 countries with over 350 clients. Company would have net cash surplus of Rs. 1,600cr-1,800cr.

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Stock valuation:
The benefits of the combined entity will start being reflected only after few quarters after merger completion. The combined entity is expected to post a 10.7% CAGR over FY2011-13E, with growth of 8.9% yoy in FY2013. PAT of Tech M and Satyam is expected to be at Rs.674cr and Rs.900cr for FY2013, respectively. Considering the new share count, the consolidated EPS comes in at Rs.68.2. If you value Tech Mahindra conservatively at 13x FY2013E EPS of Rs.68.2, one may buy stocks of Tech Mahindra with stock price target of Rs. 900 in with one year time horizon.

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