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Margins impacted; recovery strategy in place…

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)

Q3FY22 Results: TechM reported weak numbers on the margins front.

Dollar revenues increased 4.1% QoQ to US$1,533 million while revenue grew 4.7% QoQ in CC terms

EBIT margins dipped 40 bps QoQ at 14.8%

Order book was at US$704 million in Q3FY22

What should investors do? TechM’s share price has grown by ~3.3x over the past five years (from ~| 468 in January 2017 to ~| 1,570 levels in January 2022).

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

Target Price and Valuation: We value TechM at | 1850 i.e. 23x 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 13.6% CAGR growth in FY21-24E

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

BUY with a target price of | 2,300

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