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5G to introduce multiple growth tailwinds

We hosted a session on 5G ecosystem with Mr. Manish Mangal, CTO & Global Business Head, 5G & Network Services, TechM to understand the 5G ecosystem and how it will benefit the Indian IT players. 5G is driving a comprehensive change across 1) CSPs - 5G is expected to significantly bring down the cost of capex and opex for network operators and enable operators to improve customer experience, 2) enterprises - inherent benefits of 5G (high speed, low latency, high density) offer opportunities to improve the existing process efficiency and create new business models, 3) ecosystem – emergence of newer, smaller, nimble vendors that may drive changes with Open RAN.

There are 150 operators who have deployed 5G and 1bn mobile devices with 5G connectivity globally. US is witnessing accelerating 5G deployment. AT&T’s key initiatives for CY22 include increasing pace of 5G deployment and expansion of 5G service, including to underpenetrated markets.

Ericsson Mobility estimates 87% 5G penetration in North America by CY24. 5G has fuelled huge demand for IT services players like TechM, right from network planning to deployment and operations. Operators are investing in network simplification and transformation, automating field service operations to reduce the cost of operations. Another key demand area is Open RAN deployment in new 5G capex projects.

Enterprise use cases for 5G are still in testing phase but industries such as manufacturing and logistics have started deploying 5G for various use cases. We believe TechM will likely be the biggest beneficiary of 5G-led demand for IT and network services.

TechM has significant presence in top 3 CSPs in each of the top 60 countries, giving it a huge competitive advantage in terms of domain expertise and strong client base for 5G-related network transformation. As per the management, TechM is the only IT services company to have a dedicated 5G and network services practice. It is the only vendor to have significant wallet share with all three greenfield network operators in the world – 1) DISH Network of US, 2) 1&1 Drillisch AG of Germany, and 3) Rakuten of Japan.

TechM is dominantly trying to become an enabler for next gen network providers via creation of platforms such as Netops.AI and Blue Marble. 5G led network and IT services demand is likely to play out over the next 3-5 years with large scale 5G deployment and enterprise wide 5G usage improving over the same period. We continue to value TechM at 14x FY24E earnings and arrive at a target price of Rs1,022. TechM is currently trading at 16x / 14x over FY23E / FY24E EPS of Rs62 / Rs71, respectively. Maintain HOLD.

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