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Promising Q4; Outlook optimistic

Tech Mahindra Ltd. develops and markets computer software. The Company markets software for telecommunications equipment manufacturers, telecom service providers, software vendors, and systems integrators.

* Q4FY21 revenue up 2.5% YoY (+0.9% QoQ), primarily due to widening BPO segment (+28.6% YoY). On constant currency (CC) basis, revenue in USD terms was at +0.7%/-0.5% on QoQ/YoY.

* EBIT margin stretched by ~820bps QoQ, backed by better utilization (87.0%) and modest depreciation.

* No. of active clients rose by 10, QoQ to 1007 vs. 997 in Q3FY21.

* Expanding margins and prospective deal wins should support company performance and help gain market share. We reiterate our BUY rating on the stock with a revised TP of Rs. 1,175 on 18x FY23E adj. EPS.

Strong deal pipeline to help gain momentum

Consolidated revenue for Q4FY21 rose 2.5% YoY to Rs. 9,730cr (+0.9% QoQ) mainly as BPO segment outperformed at a 28.6% YoY growth (flat QoQ) to Rs. 1,057cr. IT segment remained flat YoY at Rs. 8,673cr (+1.0% QoQ). In USD terms, BFSI (+10.3% YoY, +4.9% QoQ) and Technology segment (+27.8% YoY, +0.5% QoQ) outgrew with strong demand acceleration and structural shift to digital world. Whereas, Manufacturing (-5.2% YoY, +1.9% QoQ) and Retail segments (+6.2% YoY, -3.2%QoQ) witnessed mixed results. However, robust net new deal wins at ~USD1.04bn (Communication - USD518mn, Enterprise – USD525mn) are expected to fuel growth going forward.

Sustained margin improvements

EBIT for Q4FY21 soared at a 112.1 % YoY growth to Rs.1,553cr (+1.0% QoQ) with a margin expansion of ~820bps YoY, aided by operational efficiency, high utilization (87.0%), improved offshoring, lower employee expenses and modest depreciation due to conservative capex. SG&A saw an increase on annual basis due to ramp-up of recruitment costs (+2.6%YoY). Adj. PAT (after adjusting for impairment of goodwill) saw an uptick of 10.5% YoY to Rs. 1,132cr with a strong FCF of Rs. 186mn (164.3% of PAT) for Q4FY21.

Key concall highlights

* Receivable days improved to 92 days in Q4FY21 (vs. 95 days in Q3FY21), resulting in FCF growth.

* Guidance of 15% reiterated for coming quarters upon recording its highest EBIT margins (16.5% in Q4FY21) in the last 6 years.

* Highest in history - Dividend declared at Rs.45 per share (Final - Rs.30 + Special – Rs.15).

Valuation

The telecom business should benefit with 5G roll out, demand for Cloud, AI, legacy modernization and strong digital transformation deals. Further, TechM stands out from the crowd with strong play in network infrastructure services. Gaining significant traction in the market remains its primary focus in the near term. We reiterate our BUY rating on the stock with a revised target price of Rs. 1,175 on ~18x FY23E adj. EPS.

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