Add Tech Mahindra Ltd For Target Rs. 1,270 - Emkay Global Financial Services
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? TechM gave further insights into its NXT.NOW growth strategy, focusing on connectivity, experience, cloud, engineering, and sustainability through differentiated offerings. The company also highlighted the progress made on large deals, client mining, and alliances to accelerate revenue growth while driving delivery excellence to steer margin expansion.
? The company expects the leadership transition to be smooth as it is a planned succession and executed diligently with a reasonable time period to transition to the new leader and the growth strategy laid out is unlikely to change. While management anticipates nearterm weakness in revenue growth, it is optimistic about its medium-term growth outlook, driven by 5G, cloud, engineering, sustainability, and Industry 4.0.
? Management unveiled its plan to focus on building a products and platform business and scaling up the co-creating business. The products and platform business is currently at ~USD450mn run rate and has the potential to scale to USD1bn in the next three years.
? We roll forward our TP to Mar-25E EPS and maintain Buy with a TP of Rs1,270 (earlier 1,220) at 16x its Mar-25E EPS, considering the anticipated improvement in the margin trajectory, better capital allocation, and reasonable valuation.
NXT.NOW growth strategy evolving from being resilient to being relevant: TechM has provided further insights into its NXT.NOW growth strategy, focusing on connectivity, experience, cloud, engineering, and sustainability through differentiated offerings. TechM highlighted five key trends – 1) growing enterprise tech intensity (CX and digital engineering), 2) cloud and data services (led by data and analytics, cloud native, industry cloud, and security), 3) increased interest in emerging technologies (5G, Metaverse, and AI), 4) business transformation using industry solutions and co-creation, and 5) partnerships (focus on top-10 partnerships). The company expects strong execution of its growth strategy, focusing on five above-mentioned areas, client mining, large deals, alliances expansion, and products and platforms, which would drive sustainable revenue growth while improving profitability.
Products and Platform – The next big thing at TechM: TechM will reorganize the platform business under one brand – Comviva 2.0, which will be launched in April-23. The business is currently worth ~USD450mn and has the potential to scale to USD1bn in the next three years. The company plans to invest USD60-90mn in the business to accelerate revenue growth. TechM is also working on scaling up co-creation with its customers.
Focus remains on driving M&A synergies: TechM highlighted that since 2019, the company has invested ~USD1.18bn+ (includes upfront payment, yearly payouts till date, and estimates for FY23-FY25) on M&As. These acquisitions delivered a 4.3% revenue CQGR from the acquisition to Q3FY23. For three major acquisitions (CTCO, DigitalonUS, and Allyis), standalone growth has been in line with expectations. While profitability for DigitalonUS and Allyis has been at par, CTCO’s profitability was impacted by its exposure to Eastern Europe. Management remains confident on the integration and realization of benefits from its M&As.
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