Buy Tech Mahindra Ltd For Target Rs.1,870 - Emkay Global
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Communication-led revenue growth in Q2; growth momentum to sustain
* Tech Mahindra’s Q2FY22 operating performance was better than expectations. Revenues grew 6.4% QoQ (7.2% CC) to USD1,473mn, led by Communication, Media & Entertainment (6.7%) and Enterprise (6.3%) verticals. EBITM remained flat QoQ at 15.2%.
* Net new deal wins were robust, with a TCV of USD750mn, split across CME (USD255mn) and Enterprise (USD495mn). The deal pipeline remains healthy, and management expects healthy deal win momentum to continue in H2 as well.
* Management remains confident of sustaining revenue growth momentum and EBITM in H2 on the back of broad-based demand, uptick in 5G-led spending, robust demand for digital engineering, cloud, data & analytics services, healthy deal intake, and deal pipeline.
* We raise FY22-24E EPS by 1.3-2.6%, factoring in the Q2 beat and recently announced acquisitions. Maintain Buy with a revised Sep’22 TP of Rs1,870 at 25x Sept’23E EPS (23x earlier), reflecting higher medium-term growth assumptions (see Exhibit 15).
What we liked?
Broad-based growth, strong order intake, EBITM beat and capital payout.
What we did not like?
Spike in attrition (21.2% vs. 17.2% in Q1FY22).
Broad-based revenue growth in Q2; growth momentum to sustain:
TechM’s Q2FY22 revenues grew 6.4% QoQ to USD1.47bn (7.2% CC), beating expectations. Revenue growth was broad-based and led by continued momentum in the Technology, CME, BFSI and Retail, Transport & Logistics verticals, and the Americas and RoW regions. Revenue growth was driven by Digital Engineering, Cloud, Data & Analytics services. In Q2, the company signed net new deals worth USD750mn (USD255mn in CME and USD495mn in Enterprise).
The deal wins were broad-based across verticals and geographies. Management indicated that the deal pipeline remains robust, and it expects similar deal closure momentum to continue in H2FY22 as well. 5G, customer experience, data, analytics and cloud remain the key focus areas, and the company is actively strengthening its capabilities in these areas through M&As. Management remains fairly confident of sustaining revenue growth momentum in H2, given broad-based demand across verticals, robust deal wins and a strong deal pipeline.
Tech Mahindra announced the acquisition of Lodestone to expand its digital engineering capabilities for a cash consideration of up to USD105mn (~2.4 EV/Sales). It also acquired WMW (We Make Websites Limited) for a cash consideration of GBP9.4mn (~2x EV/Sales) to expand its experience design capabilities and help build the Shopify practice.
EBITM to be at least 15% in FY22E:
EBITM remained flat QoQ at 15.2% as the benefits from the offshore shift and revenue growth-led operating leverage were negated by lower utilization, higher subcontracting costs and supply-side inflation. TechM is confident of sustaining at least 15% EBITM in FY22E on an expected acceleration in revenue growth, improvement in the performance of portfolio companies, flattening employee pyramid, offshore shift and automation-led operating efficiencies, negating the impact of supply-side challenges (recruitment and retention costs), and an expected normalization of travel and other costs.
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