Downgrade TechM; growth in telecom biz may turn soft

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Updated: September 23, 2015 4:07:01 PM

Lower Tech Mahindra (TechM) to ‘neutral’ (earlier 'buy') with a revised target price of Rs 660 (earlier Rs 775) as we expect...

Lower Tech Mahindra (TechM) to ‘neutral’ (earlier ‘buy’) with a revised target price of R660 (earlier R775) as we expect its telecom business (55% of revenue) to enter a patch of soft growth over the next 2-3 quarters. This is on account of delays in large deal closures likely due to higher complexity of work in areas like network outsourcing. Our thesis on Tech Mahindra’s strong positioning in telecom business on an expanding addressable market stays unchanged. However, given the likely delays in deal wins, we see stock consolidation post strong returns of 40% in past 1 year.

We cut FY15-17 EPS by 1-11%, baking in the slowdown in telecom, and consequent impact to operating margin from lower operating leverage.

This also includes a hit of 5% from recent cross-currency headwinds, like for all other IT stock. We now expect organic, constant currency revenue growth to slow to 13% y-o-y in FY16 versus 17% in FY15. We lower our target multiple on TechM from 16x earlier to 15x.

We await a stronger late-stage deal pipeline in telecom. This could take up to 12 months as company integrates its recent acquisition of LCC and creates a stronger go-to-market front for network outsourcing deals. We would also watch for faster than expected improvement in operating margin.

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