A 39% correction in the stock price more than captures this risk. Positives remain of leadership in telecom, 5G opportunity albeit delayed, a sharper go-to-market in enterprise segment and improved capital allocation.
We upgrade Tech Mahindra (TM) to ‘buy’ from ‘add’ noting attractive valuations. We recognize the challenges of a recessionary environment and near-term disruption to delivery from lockdowns, which reflects in 11- 14% EPS cut for FY21-22E. A 39% correction in the stock price more than captures this risk. Positives remain of leadership in telecom, 5G opportunity albeit delayed, a sharper go-to-market in enterprise segment and improved capital allocation. We value the stock at 12.5X FY2022E earnings resulting in FV of Rs 680 (Rs 830 earlier).
We cut FY21-22E revenue, Ebit and EPS estimates by 8-9%, 12-14% and 11-14%. We detail the key changes to our estimates. We forecast revenue decline of 1.1% FY21E.
We cut FY21revenue estimates by 9.1% due to the following factors, TM has 10% exposure to BPO, a good chunk of which is voice BPO services. Lockdowns in Philippines and India will impact delivery in our view, network roll out services, though small, will come to a halt, while revenues from Comviva will be impacted, contraction in revenues of portfolio companies especially Pininfarina (over $100 mn of annual revenues and deterioration in client health especially in the enterprise segment and potential delay in ramp ups. 5G opportunity, a better telecom portfolio and solid enterprise segment will power growth in FY22E.
Margin recovery in FY21E will pause due to deterioration in performance of portfolio companies, potential pricing pressure resulting from a global recession and transient impact of missed billing, cost of work-from-home and cost structure that was built for growth. We expect impact of transient factors to abate in FY22E and performance of portfolio companies to normalise from disruptions caused in the near term. We forecast 10 bps decline in Ebit margin in FY21E and 90 bps increase in FY22E.
TM has basic building blocks to grow at a robust pace beyond a weak FY21E. The company is the leader in the telecom vertical with a broad-based portfolio of offerings and a solid client base. TM is positioned to gain share in the consolidation decision in telecom vertical and gain from the 5G opportunity, as and when it unfolds. Enterprise business segment is reaping benefits of improved competencies, sharper go-to-market positioning and higher success rate in large deals. The cut in estimates largely captures Covid-19 led disruption of business. Tech Mahindra is available at an attractive valuation of 9X FY22E EPS. We value the stock at ~12.5X FY22E EPS leading to a revised fair value of Rs 680, down from Rs 830 earlier.