Growth issues which are concentrated in top telecom accounts are being extrapolated to overall business, in our view. This is causing markets to discount the merits of fast growing non-telecom business, steady margin improvement with incremental levers and strong business positioning in telecom. We forecast a 11%/18% growth in US dollar revenue/Ebit over FY16-18E due to margin levers kicking in as growth trajectory improves steadily. We tweak our price target and upgrade to ‘buy’.
Issues limited to top telecom clients, non-telecom growth robust, metrics and large deal wins healthy. Tech Mahindra’s growth pangs have been limited to the large telecom clients who have pushed out IT spends in the midst of M&As and internal restructuring while its positioning as a top provider for the vertical has remained intact.
Outside the Top-5 accounts, deal flow has been robust and client metrics healthy on both active clients as well as addition to large revenue bucket. We believe that while problems are specific to top telecom accounts, the perception of negativity is being extrapolated to the overall business.
Tech Mahindra has improved margins by 210 bps, driven by improved utilisations over the past three quarters.
We believe that telecom should start recovering by 2HFY17 with volatility expected in the interim, and the non-telecom business should continue to grow ahead of industry growth in FY16-18E (low teens). This should result in overall revenue growth at 11% over FY16-18E. Margin levers should lead to Ebit margin growth of 180bps in FY17/18E and Ebit/EPS Cagr of 18%/16% during the same time period.