It has come full circle for TechM. Post the Satyam acquisition, the Street expected non-telecom to become a growth driver, yet it was telecoms that continued to drive, indeed accelerate, growth. With telecom growth now slowing, the focus is now back on non-telecom. We continue to believe it is hard for the non-telecom business to consistently outperform due to heightened competition and a lack of scale in large vertical markets, like banking financial services and insurance (BFSI) and retail.
While the stock has corrected nearly 30% since its peak in February, the weakness in its business has been accentuated. The acceleration in growth that came from top clients and deals (like BASE) is behind the company. We think M&A at TechM has peaked.
Revenue in Q1FY16 is likely to remain flattish led by both weak business and seasonal factors. Ebitda margin is expected to fall c70bps q-o-q. We forecast a 17.5% Ebitda margin for FY17 vs 15.2% Ebitda in Q4FY15. Our EPS forecasts imply 5% downside to consensus FY17 estimates. We continue to use a valuation multiple of 17x FY16 earnings, which leads to a lower target price of R550 (from R690). We retain ‘hold’.