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Margins impacted; Outlook positive

Tech Mahindra Ltd. is one of the top 5 IT companies in India which provides IT and ER&D services for telecommunication equipment manufacturers, telecom service providers, software vendors, and systems integrators.

• For Q4FY22, Tech Mahindra Limited reported 24.5% YoY increase in revenue to reach Rs. 12,116cr and 39.2% YoY increase in PAT to reach Rs. 1,505cr.

• EBITDA margin shrank 230bps YoY to 17.2% due to increased subcontractor costs, higher employee costs along with lower utilization.

• We remain positive on the company's business outlook in the mediumto-long-term, considering company’s capabilities in new techs and the strong deal pipeline. We reiterate our BUY rating on the stock with a revised target price of Rs. 1,372 based on 17x FY24E Adj. EPS.

Margin contracted due to increased costs Q4FY22 revenue rose 24.5% YoY and 5.8% QoQ to Rs. 12,116cr driven by the growth across all verticals. EBITDA increased to Rs. 2,088cr in Q4FY22 (+10.1% YoY, +1.4% QoQ, while EBITDA margin was down by 230bps YoY to 17.2% due to spike in employee benefit expenses (+28% YoY, 6.8% QoQ), higher depreciation and amortization expenses (+40.5% YoY, 33.7% QoQ) from additional investments in hardware and software. Upon continuation of Hedge policy approved by Board, Forex gain rose to 63.5% QoQ. Marginal Tax rate reduced to 17.5% vs 27% in Q3FY22, resultantly PAT rose to Rs.1,506cr 39.2% YoY and 10.0% QoQ.

Key concall highlights

• Headcount stood at 151,173 (+4.2% QoQ). Total number of active client increased to 1,224 (+2.7% QoQ, +21.5% YoY).

• New deal wins amounted to $1bn, constituting $366mn worth of deals from the Enterprise segment, and the rest $645mn from CME.

• Bharti Airtel and Tech Mahindra announced a strategic partnership to set up a joint 5G innovation lab to co-develop and market 5G use cases in India. This will also bring customized Enterprise Grade Private Networks to the country and helps in advancement of technology with the company.

• Company announced recent collaboration with Yellow.ai to work on next-gen conversational-AI solutions, and collaboration with Cisco, Celonis, APPSLINK, Ludium Labs, ASKA, and Nokia for the advancement in technologies and services offered.

Growth across all verticals

Topline growth primarily driven by (+17.2% YoY, 4.1% QoQ) in communications, (+17.4% YoY, 5.4% QoQ) in Enterprise, (+14.6% YoY, 5.1% QoQ) in IT services and (42.9% YoY, 4.4% QoQ) in BPS, while on geographical basis (+18.6%, YoY, 3.6% QoQ) in Americas, (18.5% YoY, 8.3% QoQ) in Europe and (14.1% YoY, 3.8%QoQ) in rest of the world.

ValuationWe remain positive on company’s business outlook on the back of strong new deal wins, deal pipeline and capabilities in new tech. we expect the margin pressure led by supply side issues to subside in the coming quarters, supported by the higher fresher intakes. We foresee earnings to grow at a healthy 13% CAGR over FY22-24E and reiterate our BUY rating on the stock with a revised target price of Rs. 1,372 using a target multiple of 17x P/E on FY24E Adj. EPS.

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