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Margin led focus till leadership change…

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)

Investor Day Highlights:

* We attended TechM Investor Day. On leadership transition, the CEO mentioned that he expects transition to be smooth as it is a planned succession and they are currently focusing on margin expansion

* The company for the first time talked about their Product & Platform (P&P) business, which is at US$450 mn revenues and it is likely to scale up to US$1 bn in the next three years

* The company is looking at better medium-term outlook on 5G, cloud, sustainability related spending while margins are likely to see a recovery from FY24 onwards

What should investors do? TechM’s share price has grown by ~1.7x over the past five years (from ~| 612 in March 2018 to ~| 1,085 levels in March 2023).

* We maintain our HOLD rating on the stock

Target Price and Valuation: We value TechM at | 1130 i.e., 13x P/E on FY25E 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

* TechM has restructured its Products & Platforms business expects to grow this business to US$1bn in next three years

* Restructuring of low margin portfolios, acceleration in Europe and improving demand from lift & shift deals to drive 11.6% CAGR in FY22-25E

* Margins recovery will likely play out from FY24 onwards

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 | 1,730

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