Stock corner: ‘Buy’ Tech Mahindra, revival of telecom biz to drive growth

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Published: December 2, 2019 1:05:03 AM

While margin levers such as automation and off-shoring remain, we believe FY20 margin will be lower than FY19 owing to higher costs incurred due to deal ramp-ups and a slow start to the year (H1FY20 margin down 210bps y-o-y).

Telecom is seeing sustained demand; this, coupled with a stable enterprise business, should help TechM deliver robust revenue growth. Telecom is seeing sustained demand; this, coupled with a stable enterprise business, should help TechM deliver robust revenue growth.

Key highlights of our recent meeting with Tech Mahindra’s (TechM) management are: (i) the telecom vertical is entering sustained growth phase after a stagnant three years; (ii) shift in demand for technological solutions from CTO to business heads will cushion TechM during an economic downturn; and (iii) management expects telecom operators’ need to make IT infrastructure 5G ready to spur sustainable demand from enterprise 5G. While margin levers such as automation and off-shoring remain, we believe FY20 margin will be lower than FY19 owing to higher costs incurred due to deal ramp-ups and a slow start to the year (H1FY20 margin down 210bps y-o-y).

That said, demand in telecom is reviving; deal wins over the past two-three quarters have been skewed towards the communications vertical. We expect robust revenue growth led by a resurgent telecom vertical and stable enterprise business. The stock trades at 14.6x FY20e EPS. Maintain Buy with TP of Rs 937.

Outlook: Greener pastures ahead
Telecom is seeing sustained demand; this, coupled with a stable enterprise business, should help TechM deliver robust revenue growth. While margins for the company may come under pressure over the short term, TechM has enough levers such as automation and operational efficiencies to recoup the same. At CMP, the stock trades at 14.6x FY20e EPS. We maintain ‘BUY/SP’ with target price of Rs 937 (16x FY21e EPS).

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