Stock Fundamentals

Tech Mahindra: Buy

K Venkatasubramanian | Updated on March 13, 2018

Big deals Several big ticket client wins hold the company in good stead   -  Business Line


Good growth and diversified revenue mix make Tech Mahindra a good pick

Over the last few years, Tech Mahindra has climbed the outsourcing ladder to become the fifth largest IT vendor listed in India. The company has also been able to make strong inroads into newer segments after Satyam Computer was merged with it.

Healthy addition of large-sized clients, a well-diversified geographic mix and expanding footprint in verticals, such as manufacturing, technology, media and entertainment and BFSI (banking, financial services and insurance) are key positives for the company.

Investors with a one-to-two year perspective can buy the Tech Mahindra shares. The stock has run up nearly 65 per cent in the last 10 months, in the light of its improving performance.

At ₹2,121, the stock trades at 15 times its likely per share earnings for 2014-15. This is at par with the valuation commanded by the likes of Infosys and Wipro, but is at a discount to HCL Technologies. Given Tech Mahindra’s good growth trajectory, the valuations are still reasonable and provide an entry opportunity with a two-year horizon.

In the current rallying markets, technology stocks may be considered defensive. But given the growth that this segment has been able to deliver across market cycles, selective quality bets could pay off well.

In 2013-14, Tech Mahindra’s revenue grew 31.4 per cent to ₹18,831 crore, while its net profit rose 55 per cent to ₹3,029 crore.

The company’s acquisitions, which have brought Hutchison Global Services and Comviva into its fold, have helped strengthen its key telecom vertical.

Diversified offering

In the telecom vertical, Tech Mahindra continues to be among the top players as it delivers services across the value chain for clients, placing it ahead of even top-tier peers in this business. This vertical contributes 47 per cent of the company’s revenue and grew 22 per cent in 2013-14. Manufacturing (19 per cent of revenue), media and entertainment (11 per cent) and BFSI (10 per cent), the other key segments also witnessed growth during the last fiscal.

The company has increased focus on the manufacturing and BFSI segments and has been able to win large deals from the likes of Volvo and UBS. Tech Mahindra is also associated with the football federation, FIFA, and played a part during the recent world cup. The company has a desirable geographic-mix with a blend of mature and emerging markets. The Americas account for 45 per cent of its revenues, Europe 32 per cent and the rest of the world (including markets such as Australia, West Asia and India) makes up the balance 23 per cent.

European and Australian markets too have witnessed a revival for most top-tier players. However, revenues from the US and the ‘rest of the world’ markets have grown at a pace faster than the overall company’s revenue rate. IT spends have revived significantly in the US and Tech Mahindra’s increasing footprint would help it tap into this large market. After years of depressed spends, the telecom segment is set to increase the outlay on technology — this will help players such as Tech Mahindra.

Healthy additions

In the last one year, the company has added two new clients in the $50-million-plus category and another three in the $20-million-plus category. In the $10-million bucket, it has added as many as 10 new customers, indicating a strong momentum in deal wins.

Its top customers continue to grow at a healthy clip. The company’s top 10 customers contribute nearly half its revenues.

From an operations perspective, the company’s utilisation at 78 per cent in 2013-14 compares quite favourably with peers. These levels, while giving scope for improvement, indicate that the company has been able to manage healthy volumes and traction from customers.

The relatively high attrition rate of 18 per cent is a concern though. Any sharp wage hike to stem the tide may impact margins.

Published on July 20, 2014

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