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Result Synopsis

Tech Mahindra (TECHM) reported mixed financial performance for the quarter. The sequential revenue growth was inline with expectations; while, EBIT margin came in below expectation. It reported sequential growth of 0.1% QoQ in INR terms, (flat QoQ in USD terms), led by Manufacturing (up 1.4% QoQ). There was sequential decline in EBIT margin(down 83bps QoQ) on higher SG&A expense. Employee attrition continues to moderate as LTM attrition was down 2.5 percentage points QoQ to 14.8%.

We believe that the multiyear technology adoption cycle broadly remains intact. However, the clients remain cautious regarding the evolving macroeconomic situation and that is reflected in increased time in decision making in recent deal wins and consequently, we expect moderation in growth in near term. A pick up in 5G related deals is expected to support revenue growth going ahead. Falling employee attrition, improving employee pyramid and focus on better revenue mix should support operating margin going ahead. We estimate revenue CAGR of 10.5% over FY23?25E with average EBIT margin of 13.3% over the period. We maintain our ADD rating on the stock with target price of Rs 1,193/share at 15.0x on FY25E EPS. The stock trades at PER of 15.0x/12.8x on
FY24E/FY25E EPS.

Result Highlights

* Reported revenue of Rs 137.2bn (down 0.1% QoQ in INR terms, flat 0.0% QoQ in USD terms). The sequential revenue growth was led by Manufacturing (up 1.4% QoQ); other vertical (up 3.0% QoQ), CME (up 0.7% QoQ), and BFSI (up 0.3% QoQ). While TME (down 0.4%QoQ) and Retail & Transport (down 10.8%) had muted performance. Overall, the revenue growth in cc terms was 0.3% QoQ.
* EBIT margin decreased by 83 bps QoQ to 11.2%, led by increase in SG&A expenses.
* Signed net new deals of $592mn vs $795mn in Q3FY23 and $1,011mn in Q4FY22.
* Offshore effort mix was up 30 bps QoQ to 72.8%. Total number of Active clients increased by 7 QoQ to 1297.
* Total headcount decreased by around 4,668 QoQ to 152,400. LTM attrition was down 2.5 percent points QoQ to 14.8%. Utilization excluding trainees was up 10 bps QoQ to 86.5%.
* DSO including unbilled decreased by 2 days to 96 days.

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