Tech Mahindra - Deal wins gaining momentum - HDFC Securities

Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities and Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities

Tech Mahindra (TechM) posted the lowest revenue growth within Tier-1 IT, but we maintain our BUY rating on the company, based on acceleration in net-new TCV and better margin performance. Key attributes that underscore our positive outlook include (1) net new TCV win of USD 1.04bn (the highest in the past five quarters) evenly distributed across Telecom (Telefonica) and Enterprise verticals; (2) strong deal pipeline; (3) guidance of double-digit revenue growth in FY22E; (4) higher single-digit growth in Telecom, led by network modernisation and 5G opportunity; (5) double-digit growth in Enterprise, driven by Technology, BFSI and recovery in Manufacturing vertical; and (6) ~100 bps margin expansion in FY22E following a 260bps expansion in FY21. Robust cash conversion (OCF/EBITDA of 118%) and a special dividend of INR 15/share were positives. However, supply side concerns remain; any rise in attrition rate (delay in wage hike) in a peak utilisation environment can be challenging. We increase our EPS estimate by 6.1/3.2% for FY22/23E to factor in better growth and margin. Our target price stands at INR 1,160, based on 17x (~20% premium to 5Y average) FY23E EPS. The stock is currently trading at a P/E of 16.0/14.1x FY22/23E.

4QFY21 highlights: (1) TechM revenue stood at USD 1,330mn +1.6% QoQ (vs. our estimate of USD 1,332mn); (2) Enterprise grew +1.8% QoQ (+2% in FY21) while Telecom grew +1.3% QoQ (-6.1% in FY21); (3) within Enterprise, BFSI/Manufacturing/Technology grew at +4.8/+1.6/+1.6% QoQ, while Retail declined 3.5% QoQ; (4) EBIT margin at 16.5% (estimate of 15.6%) was at a six-year high (+55bps QoQ), aided by higher offshoring, lower sub-con, portfolio rationalisation and higher utilisation; (5) TechM provided wage hike effective Apr'21, which could impact the margin in 1QFY22; and (6) net-new TCV improved +129% QoQ to USD 1,043mn (Telecom/Enterprise at USD 525/518mn).

Outlook: We have factored in USD revenue growth at +10.1/10.2%, factoring in Telecom growth at +9.4/9.2% and Enterprise growth at +10.6/10.9% over FY22/23E respectively. EBIT margins are estimated at 15.3/15.4% over the same period, translating into an EPS CAGR of 15% over FY21-23E (TCS/INFY/WPRO at 17/15/10% CAGR).

Shares of TECH MAHINDRA LTD. was last trading in BSE at Rs.969.25 as compared to the previous close of Rs. 963.15. The total number of shares traded during the day was 453597 in over 16344 trades.

The stock hit an intraday high of Rs. 985.65 and intraday low of 944.5. The net turnover during the day was Rs. 436559354.

Source : Equity Bulls

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