We stay neutral even as telecom commentary at TECHM has improved, given: (i) company guidance of 1-3% y-o-y growth in Telecom in FY19F looks difficult to achieve with steep asking rate of 5-6% CQGR over Q2-Q4 (vs 0.5% CQGR over last 8 quarters). TECHM has been materially underperforming peers and, even for flat y-o-y growth, quarterly deal wins of ~$300 mn+ are required assuming 4-year execution (nearly 2x the recent run rate); (ii) Enterprise growth, while strong, has seen Others segment (led by deal ramp-ups in CJS acquisition) contributing to 53% of incremental revenues over the last 12 months (LTM). With BFSI slowing (2% y-o-y) and Retail declining (4% y-o-y) and likely completion impact of CJS projects from next quarter, growth here could moderate; and (iii) margins could have a more gradual climb now with staff cuts (~12% cuts in the last 5 quarters in IT services) and utilisation not being material incremental levers.
We look for 2/10% CAGR in Telecom/Enterprise leading to overall $ revenue CAGR of 6.5%, with Ebit margins of 13.6/13.1/ 12.6% and EPS CAGR of 3.4% over FY18-21F. EPS growth is likely to be modest as high forex gains, land sales & subsidiary sales impact normalises post FY18.
Q1: Results in line with expectations
The result was in line with our estimates, with Telecom seeing higher-than-expected decline even as Enterprise showed continued momentum. The company outlook on Telecom improved driven by stronger deal wins ($200 mn in July) but, with high growth dependence of CJS-acquisition-led deals in enterprise segment, completion of the same from Q2 could impact near-term growth. The company guided for gradual improvement in margins.
EPS largely unchanged, TP rises to Rs 690 on roll forward
We reset USD-INR to 68.5 (vs 68 earlier) and lower tax rate in FY19. We look for 6.5/3.4% revenue/EPS CAGR over FY18-21F and value TECHM on 15x 1-year forward EPS of `46 (upto Sep-20F). HCLT remains our top Buy.
Our revenue estimates are largely unchanged and we now look for 1.4% decline in Telecom revenues and 12.6% y-o-y growth in enterprise segment in FY19. The decline of 1.4% revenue growth in Telecom implies a 3.2% CQGR over Q2-Q4FY19, which we believe adequately factors in the positive commentary on deal flow in the Telecom vertical. Our margins are higher by 20bps to factor in better USD-INR rate of 68.5 (vs 68 earlier) and some leverage on utilisation going forward. Material upsides to margins might be limited given onsite centric growth, 9-quarter low on SGA, pricing pressure and residual wage hikes.