We recently attended Tech Mahindra’s (TECHM) analyst meet, which offered insights into the company’s strategy. Key takeaways: (i) unveiled 3-4-3 strategy, wherein the company has identified 3 mega trends, 4 key bets and 3 objectives to accelerate growth; (ii) while enterprise business’ growth momentum has sustained, leadership in telecom is envisaged to spearhead revival; (iii) cost rationalisation will sustain margin revival (up 250bps in 2 quarters); and (iv) synergistic benefits from integrated acquisitions kicking in. The analyst meet reinforces our confidence on margin prospects and revenue revival in the telecom vertical. Maintain Buy with target price of Rs 546.
Entrenched relationships, pole position to fuel telecom revival
While enterprise business has consistently posted robust growth, weakness in telecom vertical has taken a toll on TECHM’s overall growth. However, we perceive palpable opportunities on account of communication service providers (CSPs) investing in IoT, enhancing customer experience, digital transformation and network upgrades. We believe, along with TECHM’s expertise, its established relationships and leadership in the telecom vertical will lead to positive surprises. The company has also been building platforms to jumpstart CSP client transformation, which is gaining strong traction.
M&A synergies kicking in; eyeing cross-sell opportunities
With the worst of LCC now behind it, TECHM has also learned the necessary lessons. Management indicated that recent acquisitions—HCI, Bio, Target and Pininfarina — have been successfully integrated and are leading to synergistic deal wins. The company will continue to fill in capability and geography gaps via acquisitions, but with much more caution.
Outlook and valuations: high growth on horizon; maintain ‘BUY’
With sustenance of enterprise business’ robust revenue momentum, growth revival in telecom is likely to lead to industry-leading growth. Further, with all headwinds behind it and sustained margin improvement, we estimate TECHM to comfortably post EPS CAGR of 10.6% over FY17-19. The stock currently trades at 12.8x FY19e EPS. We retain ‘BUY/SP’ with target price of `546 (14x FY19E EPS).
3-4-3: New strategy
TECHM, at the recently organised analyst meet, unveiled its new 3-4-3 strategy. Management has identified 3 mega trends in the industry and is accordingly planning 4 big bets in order to achieve its 3 objectives. It also defined trends and bets in specific industry verticals. Management stated that in the current digital and IoT wave, enhancing customer experience and helping clients in their digital transformation endeavour remain key focus areas.
Telecom business: Brightening prospects
While multiple headwinds have taken a toll on the telecom business over the past 2 years, we believe the worst is now behind. TECHM enjoys leadership in the telecom vertical by virtue of its deep domain expertise, well-diversified presence across geographies and partnerships with all major CSPs globally.
Hence, we believe, the telecom business entails huge upside potential as CSPs are looking to upgrade their networks (5G), invest in connected devices (IoT), enhance customer experience and digitally transform their businesses. Further, the company has also built an end-to-end-digital ecosystem for CSPs and its platform to jump-start digital transformation for CSPs is also gaining good traction.
Enterprise business: Revenue momentum to sustain
TECHM has been gaining healthy traction in the enterprise business as clients are increasingly looking to embed digital in order to enhance business efficiencies and drive growth. The company is transforming itself to become clients’ partner in their digital journey rather than a plain vanilla IT outsourcer. Management also enumerated how its digital solutions have helped top clients enhance their services. BFS, manufacturing, retail & CPG and healthcare have been driving TECHM’s growth. The enterprise business has posted robust CQGR of 3.9% over the past 10 quarters and we remain convinced of sustained revenue momentum in these verticals.
M&A: Synergies kicking in
Management highlighted that the HCI, Bio, Target and Pininfarina acquisitions have been successfully integrated. TECHM perceives immense cross-selling and up-selling potential and has already won 2 major synergistic contracts with Pininfarina of TCV of EUR65 mn & EUR70 mn and is about to close a deal with HCI. Management reiterated its strategy of being on the prowl for acquisitions to fill capabilities or geography gaps, but stated that it will now be more cautious and preferably target small-sized buys.
Company description: TECHM has been one of the leaders in providing end-to-end solution to the IT needs of the telecom vertical and its merger with Mahindra Satyam (MSAT) makes it the fifth largest Indian IT player. It derives 47% of its revenue from the telecom vertical. The company was incorporated in 1986 as a joint venture between Mahindra & Mahindra and British Telecommunications (BT). In 2009, Tech Mahindra acquired Satyam Computer Services Limited. TECHM has over 117,225 employees. The company’s revenues for the past twelve months stood at `300.0 bn.