Tech Mahindra’s (TechM’s) Q4 revenue growth of 0.5% q-o-q USD (0.1% const. ccy) disappointed vs our estimate of 1.6% (1.4% const. ccy) as most non-communications verticals slowed. However, the company maintained revenue growth guidance for FY20e (estimates), aided by a communications recovery and based on deal flow/pipeline. Q4 Ebit margin also missed, by 40bps, attributed to a one-off charge. Management noted levers to expand margins further. Maintain Buy on attractive risk-reward.
Miss in revenue and margin in Q4
Tech Mahindra’s Q4 revenue growth of 0.5% in USD terms (0.1% const. ccy) missed our estimate of 1.6% (1.4% in const. ccy) as enterprise vertical declined 2.2% q-o-q. Management attributed the weakness to a combination of factors: project closures/deferrals, particularly in healthcare, seasonality in retail, and high base of manufacturing in Q3. Ebit margin at 15.4% also missed our estimate of 15.8% but this was explained by a one-off charge. The company announced a dividend of `14/share (same as last year). In addition, it also returned
`19.6 bn via buy-back recently.
Overall revenue growth guidance for FY20e maintained
Despite weakness in Q4, management maintained its overall growth guidance of 6.8-8.4% for FY20e though it said growth in communications vertical (41% of revenue) is likely to be better than 5-6% guided earlier while enterprise businesses could be weaker than previous projection of 8-10%. Communications has recovered in 2HFY19 and exit rate of Q4 itself implies 5.5% y-o-y growth in FY20e; on the other hand, the exit rate of enterprise businesses implies flat growth, though management remains confident of a pick-up, particularly in 2H, based on deal wins (TCV of $408/440 mn in Q4/Q3) and pipeline. Even on margin, management indicated scope for improvement, including in subsidiaries.
Earnings call takeaways
(i) TechM has taken a wage hike from
April 1. This and other initiatives should help check high attrition of 21%;
(ii) TechM does not expect much adverse impact from Huawei’s issues in the US; (iii) Losses in associates mainly reflect Altiostar, which is in investment phase.
Risk-reward favourable — Maintain Buy
We cut estimates for FY20-21e slightly to reflect the lower revenue base of FY19 and slightly weaker growth and margins. Our TP remains unchanged at `880 as we also roll forward by a quarter. Stock is trading at 14/12x FY20/21 P/E, assuming stable margin and revenue growth of 7.5/9% (helped by a recovery in communications) and offers good risk-reward.
