Target: ₹1,190

CMP: ₹1,081.70

Watchful of macro impact on growth; levers for margin recovery Tech Mahindra’s Q2-FY23 revenue growth and EBIT margin were slightly ahead of BNP Paribas expectations. Growth was broad-based and led by the communications segment in which Tech Mahindra continues to benefit from 5G tailwinds.

Net new deal wins (Q2-FY23: $716m, Q1-FY23: $802m; LTM: +5.5% y-y) were decent despite some delay in decision-making. Management sounded cautious about the impact of the macro environment, but noted that the deal momentum and pipeline were strong.

Tech Mehindra expects pricing benefit to accrue in Q3-FY23 too and will continue to carry out actions to improve utilisation, increase offshoring, reduce subcontracting and divest low-ROI businesses in order to expand the EBIT margin.

Prioritising growth over margin is likely to result in continued organic growth underperformance by Tech Mahindra vs peers, we think. Relatively cheap valuation (c15x FY24E P/E vs c18x for HCLT) and a high dividend yield (5 per cent) make the stock look attractive to us.

We increase our FY23-25 EPS estimates by c1-4% largely on lower taxes. Accordingly, our DCF-based TP rises to ₹1,190.

Published on November 2, 2022