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Prabhudas Lilladher
Tech Mahindra (Buy)
CMP: ₹705
Target: ₹885
We believe Tech Mahindra’s organic revenue growth momentum could pivot in FY20E led by turnaround in Telecom vertical (41 per cent of total revenues). Tech M’s telecom vertical has shown three consecutive years of tepid performance over FY15-FY18 led by ramp down in LCC (acquired entity), pricing pressure in top client (AT&T), softness in Comviva and client specific weakness (KPN deal ramp down). Communication vertical organic dollar revenues (ex-LCC) remained tepid for three consecutive years (up 0.5 per cent CAGR over FY15-FY18).
We believe that the worst is behind for communication vertical and recent large deal wins in 1HFY19 should render stability for this vertical performance. While telecom pick up has already been visible in 2QFY19, we expect turnaround in this segment performance in 2HFY19 and FY20E as well. Spends in Telecom tend to be cyclical and we believe 5G led uptick should revive growth momentum in FY20E. While initial uptick from 5G would be seen with equipment vendors, service providers will benefit with a lag impact. We model communication vertical revenues to grow at 5.5 per cent CAGR over FY18-FY21E.
View: We model Tech M’s dollar revenues to grow by 4.5/7.5/9.3 per cent for FY19/FY20E/FY21E. Our EPS estimates are ₹48/57/63 share for FY19/FY20E/FY21E.
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