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JM Financial
Tech Mahindra (Buy)
CMP: ₹380.15
Target: ₹470
Tech Mahindra (TechM) bore the brunt of what we see as a strategic misstep (LCC acquisition) over FY16-17. We also believe the management has lagged in articulating and communicating a roadmap for LCC and its implications for the overall performance. This has tested both the street’s expectations and the investors’ patience (22 per cent cut in both FY18 EPS estimates and PER over the last 12 months).
Further, our recent discussions with the management suggest a possibility of incremental pruning at LCC and while we are convinced of the levers TechM has to improve margins, their play-out could get extended. This results in a 23 per cent/26 per cent cut in our FY18/FY19 EPS estimates. That said, the organic business is healthy (FY17 organic USD revenue growth was the highest among Top 5) and we remain convinced on the potential market opportunity for network services. Also, the 4QFY17 results setback appears priced in; TechM trades at 12x FY18F EPS, 13-31 per cent discount to peers. Thus, an optical improvement — once LCC stabilises — could revive investors’ interest, in our view.
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