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New deal TCV remains healthy

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 & inorganically (dollar revenue CAGR of 6.6% over the past five years)

Q4FY22 Results: TechM reported weak numbers on the margins front.

* Dollar revenues increased 4.9% QoQ, while it was up 5.4% in CC

* EBIT margins dipped 160 bps QoQ at 13.2%  New deal TCV at US$3.3 billion (bn) for FY22

What should investors do? TechM’s share price has grown by ~3.3x over the past five years (from ~| 383 in May 2017 to ~| 1,202 levels in May 2022).

* We continue to remain positive and retain our BUY rating on the stock

Target Price and Valuation: We value TechM at | 1410 i.e. 17x P/E on FY24E 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 9.6% CAGR growth in FY22-24E

* Margins in the near term would be impacted due to continued higher employee and subcontractor costs but are expected to recover

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

* HOLD with a target price of | 2,000

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