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Tech Mahindra rating – Buy: 5G investment accelerated growth in quarter

Upcycle is likely to continue; EPS for FY23/24e cut by 4.3/2.8%; ‘Buy’ maintained with target price of Rs 1,825

Voluntary attrition was flat q-o-q at 24% on an LTM basis. On a quarterly annualised basis, attrition has declined considerably and is expected to drop further over coming quarters.
Voluntary attrition was flat q-o-q at 24% on an LTM basis. On a quarterly annualised basis, attrition has declined considerably and is expected to drop further over coming quarters.

Tech Mahindra (TechM) posted revenue growth of 4.9% q-o-q (5.4% in CC) to $1.61 bn, marginally higher than our estimate of $1.6 bn and in line with Street’s estimate of $1.61 bn. EBITDA margin edged down 80bp q-o-q to 17.2%, below our and Street’s estimate of 17.3% and 17.4%, respectively. PAT stood at Rs 15.1 bn, higher than our and Street’s estimates.

Demand continues to be robust across Enterprise and CME, despite macro uncertainty. Investment in 5G has started yielding results. All in all, we are cutting FY23E/FY24E EPS by 4.3%/2.8%, but maintaining the TP at Rs 1,825 while rolling forward the valuation to Q2FY24E.

Strong demand in Enterprise and CME
Revenue grew by 5.4% q-o-q/22.6% y-o-y in CC. Revenue growth was broad-based with Enterprise revenue growing by 5.8% q-o-q in CC, and Communications, Media & Entertainment (CME) expanding by 4.8% q-o-q driven by 5G-related transformation. Within Enterprise, BFSI/Technology/Manufacturing/Retail, Transport and Logistics/Others grew by 18.4/15.1/-1.3/ -6.5/-1.6% q-o-q. By geography, Americas grew 3.7% q-o-q, Europe 8.2% and RoW 3.8%. The firm has effected some leadership changes in the Americas to support growth.

Solid deal-wins to drive further growth
TechM reported strong deal-wins of $1.01 bn, with higher contribution from the BFSI and CME verticals. It is targeting to add $1 bn in revenue next year and more than $1 bn in deal-wins each quarter. EBITDA margin contracted to 17.2% due to headwinds such as lower utilisation and salary impact owing to supply pressure. Total headcount stood at 151,173, up 6,106 q-o-q. Greater hiring of freshers suppressed utilisation to 83% compared with 84% last quarter. Voluntary attrition was flat q-o-q at 24% on an LTM basis. On a quarterly annualised basis, attrition has declined considerably and is expected to drop further over coming quarters.

Outlook and valuation: Upcycle to continue; retain ‘BUY’
TechM is witnessing strong demand environment with a higher proportion of large deal-wins, and the pipeline remains robust. Cloud revenue is growing at an accelerated pace. TechM is trading at 14.9x FY24E. We maintain ‘BUY/SN’ with a TP of Rs 1,825 (25x Q2FY24E) while rolling over the valuation to Q2FY24E.

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