Buy Tech Mahindra Ltd For Target Rs.1375 - ICICI Direct
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Margins steady, healthy order book...
About the stock: Tech Mahindra (TechM) has over 1.2 lakh employees across 90 countries serving 1000+ clients with higher exposure to Telecom (40% of revenues).
* Apart from telecom, the company caters to BFSI, manufacturing & retail
* TechM has grown organically and inorganically (dollar revenue CAGR of 5.6% over the past five years)
Q1FY22 Results: TechM reported healthy Q1FY22 results.
* Dollar revenues increased 4.1% QoQ to US$1383.6 million
* EBIT margin declined 81 bps QoQ to 15.2%
* Order book was at US$815 million in Q1FY22
What should investors do?
TechM’s share price has grown by ~2x over the past five years (from ~| 495 in July 2016 to ~| 1,128 levels in July 2021).
* We continue to remain positive and retain our BUY rating on the stock
Target Price and Valuation: We value TechM at | 1375 i.e. 18x P/E on FY23E EPS
Key triggers for future price performance:
* Healthy deal wins, traction in communication segment led by legacy modernisation, 5G, customer care, automation, network and cloud to drive revenues
* Pruning of low return geographies, acceleration in Europe and improving demand from lift & shift deals to drive 12%CAGR growth over FY21-23E
* A 210 bps improvement in margins over FY21-23E led by higher offshoring, synergies in portfolio companies, automation & operating leverage.
Alternate Stock Idea: Apart from TechM, in our IT coverage we also like Infosys.
* Key beneficiary of improved digital demand, industry leading revenue growth and healthy capital allocation prompt us to be positive
* BUY with a target price of | 1,825
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