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Strong numbers, guidance maintained

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 5.6% over the past five years)

Q2FY22 Results: TechM reported healthy Q2FY22 results.

* Dollar revenues increased 6.4% QoQ to US$1,472 million

* EBIT margins were flat QoQ at 15.2%

* Order book was at US$750 million in Q2FY22

What should investors do? TechM’s share price has grown by ~4x over the past five years (from ~| 370 in October 2016 to ~| 1,610 levels in October 2021).

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

Target Price and Valuation: We value TechM at | 1790 i.e. 24x 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 12.9% CAGR growth in FY21-23E

* A 130 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 | 2,060

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