Tech Mahindra Q4 results preview: Seasonal weakness will reflect in modest 1.5-2.5% sequential constant-currency (c/c) revenue growth of Tier-1 ITs. We expect a slightly soft but steady 10-11% growth for Indian IT in FY2017. We expect March quarter results and management commentary to lend comfort on Street’s expectations, which in our view are already moderated, realistic and achievable. We believe 1-2% lower growth in FY2017e is captured in the new valuation band—Indian IT stocks are down to 14-18X from 15-20X. The new valuation band implies that stocks are building 10-13% growth as against 11-15% earlier, for a period of 4-7 years. We note that there is potential for growth to pick up from current levels as Indian IT’s participation in digital increases.
We expect Tech Mahindra to report c/c revenue growth of 0.3% and a decline of 0.3% in $ revenues. Growth will be led by the enterprise business. Telecom vertical revenues would decline sequentially as seasonal strength in VAS business (Comviva) will be more than offset by weakness in network services (LCC). We expect Tech Mahindra to be able to restrict Ebit margin to 10 bps despite annual wage increments led by operational efficiencies, rupee depreciation and higher revenues from Comviva (seasonal) that flows through to Ebitda. We expect investors to focus on (i) deal pipeline in telecom (ii) turnaround strategy for LCC (iii) roadmap for further improvement in margins (iv) growth outlook for top accounts in telecom vertical and (v) effectiveness of initiatives to improve productivity and drive automation. We have a BUY rating on the stock with a target price of Rs 600.