Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities and Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities
We maintain a BUY rating on Tech Mahindra (TechM), based on better-than-expected revenue performance, healthy net-new deal wins (in both telecom and enterprise segments), and in-line margins. TechM delivered 3.9% QoQ CC growth, which was broad-based across verticals. The focus on large deal wins (net-new TCV of USD 815mn), following a healthy Q4 (Telefonica deal), improves growth visibility. The key attributes that underscore our positive outlook are (1) the largest deal win in the healthcare vertical (patient care modernisation); (2) healthy growth in BPS; (3) increase in intake of freshers after six quarters; (4) improvement in 5G related deals (~50% of telecom deals are related to 5G); and (5) continued growth momentum in enterprise segment, led by technology, BFSI and manufacturing verticals. The margin dipped 133bps QoQ (in line with our estimate) due to the full quarter wage hike impact. The supply-side challenges remain; rising attrition, increase in sub-contracting cost, and peak utilisation levels will limit margin expansion. We increase our EPS estimate by 4.2/4.5% for FY22/23E to factor in growth acceleration. Our target price stands at INR 1,330, based on 18x June-23E EPS. The stock is trading at 18.3/15.7x FY22/23E (~30% discount to tier-1 1Y forward P/E multiple).
Q1FY22 highlights: (1) TechM revenue stood at USD 1,384mn +4.1% QoQ (higher than our estimate of USD 1,356mn); (2) enterprise grew +4.7% QoQ and telecom grew +3.2% QoQ, despite a seasonally weak quarter of mobility business; (3) technology/manufacturing/BFSI/retail registered growth of +8.1/+4.5/+3.7/3.2% QoQ; (4) EBIT margin, at 15.2% (-133bps QoQ), was impacted by the wage hike, visa costs and higher subcontracting cost, and was partially offset by operating efficiencies; (5) net-new TCV stood at USD 815mn (-21.9% QoQ), of which telecom/enterprise TCV stood at USD 352/463mn.
Outlook: We have factored in USD revenue growth of +13.6/11.7/11.2%, factoring in telecom growth at +11/10.3/11.4% and enterprise growth at +15.4/12.7/11% over FY22/23/24E respectively. EBIT margins are estimated at 15.0/15.9/16% over the same period, translating into an EPS CAGR of 16% over FY21-24E.
Shares of TECH MAHINDRA LTD. was last trading in BSE at Rs. 1209.45 as compared to the previous close of Rs. 1127.75. The total number of shares traded during the day was 937708 in over 34150 trades.
The stock hit an intraday high of Rs. 1237 and intraday low of 1175.05. The net turnover during the day was Rs. 1140509288.