Mr. Amit Chandra & Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities.
Tech Mahindra posted better-than-expected revenue and margin along with strong free cash generation. Revenue was down 6.3% QoQ CC vs. TCS/INFY/WIPRO/HCLT performance of -6.9/-2.0/-7.5/-7.2% QoQ CC respectively. Telecom was down 8.2% QoQ CC (in line with our estimate) but Enterprise (-5.1% QoQ CC) performed better than expected. Growth was led by Technology & Media (+13.1% QoQ), while all other verticals were under pressure. BPS was down 12.6% QoQ due to both demand and supply-side factors, and recovery is expected from 2H. Net new TCV wins were down 39% YoY to USD 290mn, but the pipeline remains strong. TechM will be a beneficiary of vendor consolidation in the Telecom segment because of its leadership position. The 5G related spend has shifted to early FY22, but TechM is well-poised to benefit from this spend. Margin performance was better than expected (10.1% vs. the estimate of 8.7%), led by lower travel cost, offshoring, and lower SG&A offset by higher sub-con cost. The margin recovery will be gradual, and 4Q exit will be similar to the 1QFY20 level. We increase the EPS estimate by 7.7/5.0% for FY21/22E to factor in better growth and margin. Our target price stands at Rs 720, based on 14x (in line with 5Y average) June-22E EPS. Maintain BUY.
1QFY21 highlights: TechM revenue stood at USD 1,208mn -6.7% QoQ (vs. the estimate of USD 1,187mn). Telecom fall was driven by network services, Comviva seasonality, and COVID-19 impact. Enterprise fall was driven by manufacturing/BFSI/retail (-11.1/-4.4/-6.2% QoQ). EBIT margin expanded 10bps QoQ; a further expansion will be supported by rationalisation of portfolio companies, offshoring, and large deals turning steady.
Outlook: We expect USD revenue growth of -5.9/+6.2% in FY21/22E. We have factored in 2/3/4QFY21 growth of -0.6/+1.6/+2.3% respectively. EBIT will be at 10.5/12.0% for FY21/22E. Telecom/Enterprise growth for FY21E will be at -10.5/-2.7% YoY.
Shares of TECH MAHINDRA LTD. was last trading in BSE at Rs.682 as compared to the previous close of Rs. 674.9. The total number of shares traded during the day was 148495 in over 4899 trades.
The stock hit an intraday high of Rs. 685.4 and intraday low of 673.5. The net turnover during the day was Rs. 101000350.