While growth revival may take some time, execution and cost focus are likely to lift earnings; TP up to Rs 902
Tech Mahindra (TECHM) reported better-than-expected revenue of $1207 mn, down 6.7% versus estimated dip of 7.8%, and Ebit margin at 10.1% versus estimate of 9.6%. Margin expansion was largely due to the absence of a one-time charge q-o-q. Revenue dipped mainly due to a sharp ~11/9% q-o-q contraction in manufacturing/telecom. Management called out Q1FY21 as the worst quarter, and expects growth to revive from now on along with an improvement in margin. Deal-wins stood at $290 mn versus $475 mn in Q1FY20.
We believe, while 5G spends have been put off for a year, the enterprise business should recover strongly. We are raising the multiple from 16x to 18x in line with our bullish view on the sector, although TECHM will be an earnings growth story (as opposed to a revenue growth story). The stock is trading at an attractive 13.2 FY22e EPS. Maintain Buy with a revised TP of Rs 902 (Rs 798 earlier; 18x FY22e EPS).
Revenue slightly better; worst quarter behind: Revenue slide was led by a sharp sequential fall of 11/9/9% in manufacturing/communications/other business. While total contract value (TCV) fell off from $475 mn in the year-ago quarter to $290 mn, management cited the lockdown as the key reason for it in first half of the quarter. By vertical, media was up 13% q-o-q, whereas banking and retail reported declines of 4% q-o-q and 6% q-o-q, respectively.
Ex-5G growth to revive; zero-based costing to aid margins: Covid-19 has, for the time being, derailed 5G capex, which TECHM was banking on for revival in its telecom business. Mgmt expects the remaining quarters of FY21 to be enterprise-led, although the worst seems to be behind even for telecom. Besides, management aims to keep costs in check with focus on a zero-based costing approach, which should drive better earnings.
Outlook: Earnings growth story — We believe it will take TECHM a few quarters to revive growth (as 40% of its business, which is telecom, will struggle). That said, strong execution and cost focus will lift earnings. We are raising TP to Rs 902 while our estimates broadly remain unchanged. Maintain ‘BUY/SO’.