Tech Mahindra (TM) reported outstanding all-round revenue growth of 7.2% q-o-q in c/c backed by stable margins, strong hiring and good TCV. Communications vertical is in a good shape backed by increasing 5G contribution and good deal wins. BPO is firing and can sustain momentum for the next 2-3 years. We raise FY2022-24e revenue growth estimates by 1-2% and EPS by 0-1%. Consistency in execution backed up with good capital allocation bodes well. We raise FV to Rs 1,800, valuing the stock at 22X September 2023e EPS. BUY.
Revenue growth accelerates; Ebit margin steady: TM reported c/c revenue growth of 7.2% q-o-q and 15.5% y-o-y. In reported terms, revenues grew 6.4% q-o-q to $1.48 bn that includes 1% contribution from full quarter consolidation of DigitalOnUS and Eventus acquisitions. Growth was broad-based with communications growth at 7.7% q-o-q and enterprise at 7% q-o-q. Ebit margin was stable at 15.2% with negatives of higher subcontracting costs and backfill of attrition offset by operational factors such as offshore shift and leverage from growth. Net profit of Rs 13.4 bn, grew 25.8% y-o-y and was 4.7% lower than our estimate due to higher-than-expected ETR. DSO was steady at 92.
Record hiring, solid TCV: Net hiring stood at 14,930, a record number and q-o-q increase of 11.8%. Subcontracting cost increased to 15.3% of revenues despite strong hiring. TCV of deals ($>5 mn) was solid at $750 mn, coming on the back of strong $815 mn in June 2021 and $1.04 bn in March 2021. Strong TCV captures solid demand trends and uptick in telecom, both of which bode well for growth.
Communications–to double digit growth: Communications vertical, accounting for 40% of revenues, reported excellent 15% y/y and 7% q/q growth. The growth was a mix uptick in network deals, 5G network deals and modernisation/getting ready for 5G deals. 5G activity is picking up among telecom companies as well as for TM. We expect good revenue growth in communications for the next 3 years.
Increase FV to Rs 1,800 from Rs 1,580 earlier: Growth engine has multiple engines firing—BPO, customer experience and 5G. We forecast 16.8% revenue growth in FY2022e and 12.3% in FY2023e. TM’s improved execution shows in multiple dimensions—deal TCV, stability in margins, hiring and capital allocation. The stock trades at 21X FY2023E and still offers considerable upside. BUY.