Tech Mahindra - Multiple hits impact Q1 revenues - ICICI Securities

Tech Mahindra's (TechM) Q1FY21 revenues declined 6.3% QoQ in constant currency (CC) terms. Margins improved sequentially by 10bps to 10.1% on reported basis. Communication segment (40% of revenues) declined 8.2% in CC terms primarily due to weakness in network and VAAS services. Supply-side issues (primarily in BPS segment) meaningfully impacted Q1 revenues (causing 25% of revenue decline). Net-new (NN) deal TCV was US$290mn in Q1FY21 (US$475mn in Q1FY20); it was relatively lower due to deferral in deal closures in the first half of the quarter. As supply-side issues ease, growth in BPS and network services in the coming quarter should help stabilise the revenue profile. Pipeline continues to be healthy and the company expects margin accretion to continue in FY21. Normalised FCF/NI conversion was also healthy at ~200% in Q1FY21. Downgrade to ADD with a target price of Rs705, based on 14x Jun'22E EPS.

- Revenues weak as expected. Revenues declined 6.3% QoQ in CC terms in Q1FY21 with communications vertical revenues down 8.2% and enterprise revenues by 5.1% QoQ. Supply-side issues (causing 25% of revenue decline), freeze in client discretionary spends and Comviva revenue seasonality hit Q1 revenues. With supply-side issues improving, BPS revenues should stabilise in the coming quarters.

- Cost optimisation measures helped mitigate supply-side issues. EBIT margin increased sequentially by 10bps to 20.1% with cost optimisation measures, currency rate and absence of non-recurring CSR spends being key tailwinds, which was offset by Comviva revenue seasonality and visa costs.

- NN deal intake impacted due to deferrals in Q1 closures. NN deal wins were US$290mn with communication and enterprise verticals comprising US$105mn and US$185mn respectively. Though deal closures were slow in first half of Q1, as per the company some momentum has come back. Both within communication and key segments in enterprise, the pipeline has been healthy and TechM expects relatively higher closures going forward. Within enterprise, the pipeline is at a 3-year high with momentum expected from the US given increased traction in BFSI, HLS and HiTech verticals.

- Downgrade to ADD. Though TechM saw bigger impact of Covid-19 than peers, its business mix is relatively more defensively positioned from an intermediate term standpoint. Telecom segment comprising higher mix of revenues, healthy pipeline, maximum impact of pandemic already faced in Q1, easing of supply-side issues within BPS, continuation of cost takeout measures and major part of investment phase in large deals won in previous quarter coming to close - we see revenue levels stabilising with margins improving in H2FY21. Taking cognisance of stock price increase of ~30% in past three months, we downgrade our rating on TechM to ADD (from Buy) with a revised target price of Rs705.

Shares of TECH MAHINDRA LTD. was last trading in BSE at Rs.683.5 as compared to the previous close of Rs. 664.05. The total number of shares traded during the day was 819827 in over 18160 trades.

The stock hit an intraday high of Rs. 702.4 and intraday low of 668. The net turnover during the day was Rs. 562641217.

Source : Equity Bulls

Keywords