Tech Mahindra (TECHM) Q4 results were ahead of consensus, in line with our expectations on revenue growth. The positives were- incrementally positive commentary on telecom (51% of revenue) suggesting a gradual improvement after organic decline in FY17; reassuring enterprise segment growth; steady deal flow at $300 million levels for the last 3 quarters.
However, the reasons for our ‘neutral’ on the stock remain valid on- high top 10 clientele concentration (40% of revenue) and sluggish growth therein (seen q-o-q declines for last 6 quarters and 10% y-o-y decline in Q4); telecom lags Tier 1 IT on growth (a concern, given it is a market share gain-driven segment) and weak exit growth of -4% y-o-y in Q4 will make mid-single digit growth in FY17F difficult.
Hence, we expect 6.3% y-o-y revenue growth (ex Pininfarina) in FY17F, despite building in line with industry 10% y-o-y growth in enterprise segment.
We build in USD revenue growth of 8.4/9.1% y-o-y over FY17/18F, EBIT margins of 14.2/13.6% (vs 13.4% in FY16) and EPS of Rs 37.6/40.1. Our estimates are largely unchanged. Our TP is based on 13x 1-year fwd EPS to March 2018F of Rs 40.1.