Tech Mahindra’s Q2FY18 revenue of $ 1,179 million and margin of 14.5% surpassed Street’s estimates led by operational efficiency. Key highlights: 1) Robust 6.3 % q-o-q growth in enterprise business and 0.4% growth in telecom business; 2) Improvement of 400bps q-o-q in utilisation to 81%; and 3) Investment of $140 million in IP partnership in virtualisation and cloud management. IP partnership is expected to provide growth levers in transformation opportunities in cloud environment. Management reiterated confidence in its telecom/enterprise businesses as well as margin improvement. Maintain ‘BUY’ with target price of Rs 546. Enterprise business reported 6.3% q-o-q growth driven by 9.9%/2.2%/2.1%/1.7% growth in retail, transport & logistics/manufacturing/technology, media & entertainment/BFSI verticals.
Telecom business reported 0.4 % q-o-q growth. The company expects telecom business to report better revenue in H2FY18 led by seasonal tailwinds. EBITDA margin improved 180bps q-o-q to 14.5% following 400 bps improvement in utilisation. The company expects margin improvement trajectory to continue owing to cost rationalization and turnaround in LCC business in H2FY18. TECHM invested $140 million to partner with leading IT company for virtualisation and cloud management software, which will provide growth levers in transformation opportunities in cloud environment.
The company made cash payment of $35 million during the quarter and rest is to be paid by way of 12 equal quarterly installment starting from Q3FY18. We expect this deal to be margin accretive and drive steady revenues, as seen in case of its peers. Margin surprise and positive commentary are in line with our expectations, and we expect the trend to continue. We expect EBITDA margins to improve by 90bps over FY17- 19, driving 10.6 % earnings CAGR. We maintain ‘BUY/SP’ with TP of Rs 546. At CMP, the stock is trading at 12.5x FY19E EPS.