Tech Mahindra rating – Buy: Outstanding revenue growth in the quarter

By: |
October 30, 2021 12:45 AM

Communications vertical in good shape; execution has improved; TP up to Rs 1,800 from Rs 1,580; ‘Buy’ retained

We raise FV to Rs 1,800, valuing the stock at 22X September 2023e EPS. BUY.We raise FV to Rs 1,800, valuing the stock at 22X September 2023e EPS. BUY.

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.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1RateGain Travel IPO opens for subscription; check issue price, GMP, other details here
2Metro Brands sets IPO price band at Rs 485-500 /share
3Vedanta, Tata Motors, InterGlobe Aviation, Power Grid among stocks in focus today