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Inline operating performance; Management sounded out near term risks

Result Synopsis

Tech Mahindra (TECHM) reported inline financial performance for the quarter. Both, sequential revenue growth and EBIT margin was as per expectation. It reported sequential growth of 3.3% QoQ in INR terms, (up 0.4% QoQ in USD terms), led by Manufacturing( up 5.1% QoQ); and Technology( up 4.5% QoQ). The INR reported growth was supported by depreciation of INR by 3.4% QoQ vs USD. There was sequential improvement in EBIT margin(up 32bps QoQ) despite wage hike in the quarter, led by increased focus on operational efficiency. There was moderation in employee attrition as LTM attrition was down 2 percentage points QoQ to 20%.

We believe that the multiyear technology adoption cycle broadly remains intact. However, the clients have become cautious regarding the evolving macroeconomic situation especially in Europe and that is reflected in increased time in decision making in recent deal wins and consequently, we expect moderation in growth in near term. Employee attrition has started moderating and should support operating margin going ahead We estimate revenue CAGR of 13.5% over FY22?24E with average EBIT margin of 13.6%. We maintain our ADD rating on the stock with target price of Rs 1,226/share at 15.5x (unchanged valuation multiple) on FY24E EPS. The stock trades at PER of 18.1x/13.5x on FY23E/ FY24E EPS.

Result Highlights

* Reported revenue of Rs 131.3bn( up 3.3% QoQ in INR terms, up 0.4% QoQ in USD terms). The sequential revenue growth was led by Manufacturing( up 5.1% QoQ); and Technology( up 4.5% QoQ). While, CME ( down 1.3% QoQ), BFSI( down 2% QoQ) had muted performance. Overall, the revenue growth in cc terms was 2.9% QoQ.

* EBIT margin increased by 32 bps QoQ to 11.4%, led by control on SG&A( down 1.6% QoQ).

* Signed net new deals of $716mn vs $802mn in Q1FY23 and $750mn in Q2FY22.

* Offshore effort mix was down 10 bps QoQ to 72.7%. Total number of Active clients increased by 17 QoQ to 1279.

* Total headcount grew by around 5,800 QoQ to 163,912. LTM attrition was down 2 percent points QoQ to 20%. Utilization excluding trainees was up 2 pps QoQ to 85%.

* Announced special dividend of Rs 18/ share.

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