We met with the management of Tech Mahindra (TechM) to get an update on business. We believe revenue growth and deal closure for the communication vertical to accelerate over Q2-Q4FY19 driven by increased scope and size of earlier contracts, improved deal pipeline and conversion, and early spends on 5G. Enterprise vertical would see a blip in Q2FY19 due to project closures only to recover in H2FY19. We expect operating metrics including revenue growth trajectory, operating margin, cash conversion, return ratios to improve in FY19-20. We expect mid-single digit growth for communication and high single digit growth for enterprise business with steady improvement in operating margin. Expect high teen earnings CAGR over FY18-20E. We see recovery in telecom to be precursor to rerating of the stock.
TechM’s challenges in communication vertical troughed in Q4FY19. Management expects vertical to deliver mid-single digit growth in FY19E (implying 5%+ CQGR over Q2-Q4FY19), accelerating to low double digit in FY20. In enterprise segment, the management is confident of strong growth in BFSI vertical (no challenges of legacy), manufacturing, and healthcare (a blip in Q2FY19) led by steady deal wins in FY18. Overall, we expect TechM’s growth rate to improve to low-teens by FY20 largely led by improving visibility in the communication vertical. We expect margin-led earnings upgrade to continue in FY19, whereas revenue to be the key driver for earnings in FY20.
Despite, revenue erosion across the portfolio, TechM managed to deliver flattish revenue growth over the period. The flattish revenue performance despite multiple headwinds indicates effective sales engine, strength of service offerings in communication vertical, and strong clients’ portfolio.
