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Margins steady, healthy order book...

Tech Mahindra’s (TechM) revenues increased 0.7% QoQ in constant currency terms mainly led by 1.1% QoQ growth in Enterprise revenues. The company also reported EBITDA margins improvement of 45 bps QoQ to 20%. The order book increased from US$455 million to US$1043 million, mainly led by robust growth in Enterprise and Communication segment. The company aspires to have double digit revenue growth in FY22E based on deal wins and EBIT margins at 15%.

Healthy deal wins, traction in cloud to drive revenues

The current quarter revenues were impacted due to a delay in deal closure. However, the company expect deals to ramp up in coming quarter. In addition, TechM has seen healthy deal wins in the current quarter and expects improving deal win in the coming quarter. Hence, the company aspires to achieve double digit revenue growth in FY22E. In addition, we expect communication segment to witness improving growth led by demand from legacy modernisation (Telefonica deal was similar), 5G, customer care, automation, network and cloud.

In terms of enterprise, growth is expected to be driven across verticals (BFSI, technology, retail, manufacturing). We believe majority of double digit growth will be led by enterprise segment. This, coupled with pruning of low return geographies, acceleration in Europe and improving demand from large lift & shift deals, bodes well for longer term trend in revenues. Hence, we expect dollar revenues to increase at a CAGR of 10.4% over FY21-23E.

Margins to witness gradual improvement

Despite headwinds like wage hikes (effective April 2021), higher travel cost in H2FY21, retention pay to niche talent, increased hiring (of higher fresher) the company aspires to achieve 15% margins in FY22E. We believe, tailwinds of higher offshoring, synergies in portfolio companies (like systems, back-end and process), automation, reduction of sub-contracting cost (from current 13%), pruning of low return geographies and revenue growth will enable Tech Mahindra to achieve its desired goal. Hence, we expect EBIT margins to improve 50 bps YoY to 14.6% in FY22E and another 70 bps to 15.3% in FY22E.

Valuation & Outlook

Improving deal pipeline, focus on large deal wins, traction in 5G spend (on communication & enterprise side), revival of growth in manufacturing, acceleration in Europe and cloud is expected to drive revenues. This, coupled with improving margin trajectory and attractive valuation prompt us to be positive on the stock. Hence, we maintain BUY with a target price of | 1,120 (16 x PE on FY23E EPS) (earlier target price | 1,120).

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