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Target: ₹1,600
CMP: ₹1,482.75
Tech Mahindra (TechM)’s Q3-FY22 USD revenue growth at 4.7 per cent q-o-q CC (organic growth at 4.0 per cent q-o-q CC) was 100bps above our estimates. It was driven by yet another quarter of strong performance from BPO (9.7 per cent q-o-q/35.3 per cent y-o-y), while IT Services was impacted by furloughs (up 2.0 per cent q-o-q, ex-acquisitions).
Vertical growth was led by Comm. (+6.9 per cent q-o-q CC), while Enterprise (3.2 per cent) was modest. New deal wins at $704 million (down 6 per cent q-o-q) have stayed in a narrow range in recent quarters. Although, the management continues to see sustained traction in the deal momentum.
Tech Mahindra’s high exposure to the Communications vertical remains a potential opportunity as a broader 5G rollout could lead to a new spending cycle in this space. The company is seeing traction in 5G investments.
We expect the company to deliver good topline performance going forward, driven by continued spending from telcos/equipment makers in preparation for the 5G deployment, along with demand-led strength in the Enterprise vertical.
Continued pressure from the supply side, along with sales investments, would result in a dip in the EBIT margin in FY23 (est. -50bps YoY). This would result in a miss on the company guidance of improving margin trajectory going forward.
We expect margins to remain stable in FY22 and decline 40bps in FY23. We expect Tech Mahindra to deliver growth in the high teens in FY22.
We value the stock at 19x FY24 EPS.
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