Maintain BUY on Tech Mahindra - Strong operational performance - HDFC Securities

Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities & Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities

We maintain our BUY rating on Tech Mahindra based on better-than-expected growth and improving margin profile. USD revenue was up 2.8% QoQ CC vs. TCS/INFY/WIPRO/HCLT performance of +4.1/+5.3/+3.4/+3.5% QoQ CC respectively. Telecom growth bounced back to +4.4% QoQ (better than expected), led by rebound in Network Services and traction in BPM (+11.5% QoQ). Enterprise growth of 2.8% QoQ was supported by Retail and rebound in Manufacturing. Net-new TCV improved to USD 455mn (+8.1% QoQ), the pipeline remains robust and deal closures will improve. Spend on 5G (Networks & 5G Enterprise) is gradually increasing, and TechM, being the leader, is well-placed to benefit from this trend. Growth will be driven by both Telecom (Network services) and Enterprise (BFSI and Technology and Retail). Operational performance continues to improve, margin expansion of +173/373bps QoQ/YoY was better than expected, led by Offshoring, lower sub- con and higher utilisation. We increase our EPS estimate by +4.2/2.9% for FY22/23E to factor in better growth and margin profile. Our target price stands at Rs 1,110, based on 17x Dec-22E EPS (5Y average 1Y fwd P/E of 14x). The stock currently trades at a P/E of 18.1/16.2x FY21/22E EPS.

3QFY21 highlights: TechM revenue stood at USD 1,309mn +3.4% QoQ (vs. our estimate of USD 1,293mn). Manufacturing/Retail grew at +4.7/+8.9% QoQ while BFSI was stable at +0.9% QoQ. EBIT margin stood at 15.9% (eight quarter high), expansion was led by offshoring, utilisation (+80bps), and operating leverage. The EBIT margin of portfolio companies (22% of revenue) stood at 8.1%. Wage hike will be given in a staggered manner and operating margin band will be 14-15%.

Outlook: We expect USD revenue growth of -1.2/+8.2/+8.9% in FY21/22/23E with Telecom growth at 5.6/7.2/7.4% and Enterprise growth at +1.9/8.9/9.9% for FY21/22/23E respectively. We estimate EBIT margin at 14.0/14.2/14.7% over FY21/22/23E, resulting in FY21-23E EPS CAGR at 12.5%.

Shares of TECH MAHINDRA LTD. was last trading in BSE at Rs.958.4 as compared to the previous close of Rs. 941.55. The total number of shares traded during the day was 147097 in over 4924 trades.

The stock hit an intraday high of Rs. 972.65 and intraday low of 938. The net turnover during the day was Rs. 139677271.

Source : Equity Bulls

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