Buy Tech Mahindra Ltd For Target Rs.2150 - ICICI Direct
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Strong deal momentum to drive revenues…
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)
Rationale:
* TechM is rapidly building up scale and momentum through its focus on large deals. The company won US$3 bn of net new deal wins in LTM
* Top four verticals viz. CME (Telecom), BFSI, technology & manufacturing, which contributes 85%+ revenues, growing at double digits consistently on a YoY basis
* The company has been focusing on margin improvement as EBIT margins have improved 260 bps in FY21 vs. FY20. TechM also indicated that margin trajectory would continue to improve, going forward on elevated freshers hiring, efforts mix towards offshoring, yield management, portfolio synergy
* DSO has improved from 107 days in Q1FY21 to 92 days in Q2FY22. The company returned 64% of FCF generated over the last three years
What should investors do? TechM’s share price has grown by ~4.4x over the past five years (from ~| 405 in December 2016 to ~| 1785 levels in December 2021).
* We remain positive on the stock and maintain BUY rating
Target Price and Valuation: We roll over valuations to FY24E and value Tech M at | 2150 i.e. 25x 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 12.1%CAGR growth in FY21-24E
* A 180 bps improvement in margins over FY21-24E 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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