Tech Mahindra - Q1 FY22 first cut - YES Securities

Broadly Inline performance- spike in attrition a concern

- Revenue was broadly in line at $1,384 mn (up 4.1% QoQ). Growth was led by strong performance in enterprise segment that grew 4.7% in USD terms; whereas CME (Communication, Media and Entertainment) reported modest growth of 3.2% QoQ in USD terms.

- In term of geographical break up, growth was supported by strong performance in the Americas (up 6.8% QoQ)and Europe( up 6.6% QoQ), while Rest of World showed degrowth of 2.7% QoQ in USD terms.

- EBIT margin declined 133 bps QoQ to 15.2% (as per expectation), sequential dip on account of wage hike in the quarter

- Offshore revenue mix grew 100 bps QoQ to 38% as per industry trend.

- New deal wins remained strong- at $815 mn vs $1,043mn in Q4FY21 and $290 mn in Q1FY21.

- Number of active clients grew by 51 QoQ.

- LTM Attrition has jumped 400 bps QoQ to 17% in the quarter (area of concern). Utilisation increased by 100 bps QoQ to 88%.

View: Overall performance was in line. There has been some uptick in revenue growth momentum led by deals wins. The growth in CME (Communication, Media and Entertainment) segment (40% of revenue) continues to be modest. The 5G related deal activity has started pickup up, though it is still far from being a meaningful contributor. The uptick in attrition and along with travel expenses coming back by the end of year are potential margin headwinds. We maintain ADD rating on the stock with revised target price of Rs 1,275. Trades at PER of 15x on FY23 earnings.

Concall Highlights

- Recently launched Technology vertical showed strong (8% QoQ) growth in the quarter. It would report its performance as separate vertical every quarter going ahead.

- Deal pipeline remains strong and the quality of deal pipeline has improved over last 2 quarters and should drive revenue growth momentum.

- Continues to focus on profitability and improving operational efficiency

- Deal activity around 5G has started picking up. 5G has emerged Key part of most telecom related assignments. Enterprise 5G is getting traction but would take some time before the story plays out. The plan is to avoid high volume- low margin 5G related work and focus on work related to integration of 5G network architecture.

- Did not give any quantitative revenue/ margin guidance but broadly maintained that it would be doing double digit organic revenue growth for FY22.

- Outlined potential headwinds to margin such travel cost coming back towards the end of year and higher attrition.

- Decided to stick to its 15% plus EBIT margin guidance for FY22 (same as guidance in Q4FY21 call)

- Fresher intake is expected to pickup to manage higher attrition and it would likely maintain the hiring trend seen in Q1FY22.

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.

Source : Equity Bulls

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