Revenue commentary reflected status quo with communications revenues expected to grow in the range of 2-5% and enterprise revenues in the range of 8-10% (excluding the HCI acquisition) in FY18.
We had a meeting with Manoj Bhat, deputy CFO, Tech Mahindra (TechM), and we came back more confident about our 14% EBITDA margin estimate for FY18 and optimistic of a further meaningful improvement in FY19 given the strong margin exit expected in FY18. Revenue commentary reflected status quo with communications revenues expected to grow in the range of 2-5% and enterprise revenues in the range of 8-10% (excluding the HCI acquisition) in FY18. We reiterate our BUY rating on TechM with a target price of Rs 515, based on 13x Sep’19E EPS. We would expect some recovery at top clients within the communications segment given ramp-up of certain large deals won in recent quarters as well as early release of discretionary spends (though still at moderate levels) at a few large clients. Though LCC revenues have stabilised (were flattish q-o-q even in Q1FY18), the segment may continue to make losses even in Q2FY18 with breakeven expected in Q3FY18. We would expect Comviva to witness typical strong seasonality in H2FY18 (better than H2FY17, but lower than prior years).
Management expects overall communication revenues to grow in the range of 2-5% in FY18 – even a 2% growth estimate for FY18 implies 2% revenue CQGR in the segment from Q1FY18 to Q4FY18.Given that TechM is doing more work on the transformational side for enterprise clients, especially in the BFSI vertical, capital intensity of some of the deals may continue to be higher than before (eg, providing workspace as a service to enterprise clients may require the service provider to own the hardware). Milestones and pass-throughs are likely to continue to drive lumpiness in revenues, which was evident in Q1FY18 as well when enterprise revenues on an organic basis had declined by 1% in CC terms. That said, TechM expects enterprise revenues (excluding the HCI acquisition) to grow in the range of 8-10% in FY18, which implies a CQGR in the range of 1.5-2.5% from Q1FY18 to Q4FY18.