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Robust performance; Promising Outlook

Tech Mahindra Ltd. develops and markets computer software. The Company markets software for telecommunications equipment manufacturers, telecom service providers, software vendors, and systems integrators.

* Topline rose 18.7% YoY to Rs. 11,451cr in Q3FY22 (+5.2% QoQ) driven by robust demand across all segments.

* EBITDA margin shrank 160bps YoY to 18.0% (-30bps QoQ) on lower margin product mix and increased costs on the supply side and lower utilization. PAT grew by modest 4.5% YoY to Rs. 1,369cr (+2.2% QoQ).

* We expect company to perform well in upcoming quarters on the back of improvement in EBIT margins, restructuring within the segments and with continued pace of deal wins. Hence, we reiterate our BUY rating on the stock with a rolled forward target price of Rs. 1,724 based on 19x FY24E adj. EPS.

Topline continues to grow but margins contract

During Q3FY22, revenue from core business grew by 18.7% YoY to Rs. 11,451cr (+5.2% QoQ) led by robust demand across all segments. CME vertical remained the key player and displayed a growth of 6.2% QoQ, while Enterprise growth was 2.7% QoQ. EBITDA rose 8.7% YoY to Rs. 2,060cr (+3.2% QoQ), despite EBITDA margin shrinking 160bps YoY to 18.0% (-30bps QoQ) impacted by supply-side challenges around salary and subcontracting and lower utilization. PAT showed modest growth of 4.5% YoY to Rs.1,369cr (+2.2% QoQ), partly offset by higher tax rates (26.9% in Q3FY22 vs. 24.8% in Q3FY21) and lower other Income (-20.9% QoQ to Rs 222cr).

Key concall highlights

* BFSI segment demerges into two - BFS and Insurance, as Insurance segment ramps up with recent win deals moving forward and requires more focus to move globally in particular segment

* Management claimed to be a $6bn annual run rate company (+4.7% QoQ) with revised forecast to soon become $7bn annual run rate company

* New deal wins worth of $704mn this quarter, in line with last four quarters ($226mn for CME and $478mn for enterprise)

* Company added 4,000 plus associates this quarter

Decent performance overseas

Ahead of Indian and Mexico supply market, Company extended its supply base to new infant cities- Romania, Costa Rica, Latvia, Belarus for better product quality and lower costs. Moving forward, owing to the Blockchain investment in Europe, the company will better perform with familiar names like Web 3.0, NFT and Metaverse combined with the connectivity solutions around 5G and some of the user applications. While on the Geographical revenue front, America grew to 48.9% vs 47.8% in Q2FY22 and Europe and rest of the world declined by 40bps and 30bps QoQ respectively.

Valuation

Company is expected to fare well on the backdrop of continued growth in revenue along with restructuring in the segments, while continued pace of deal wins will further aid the revenue growth. Also, pressure in margin due to higher supply costs, should be offset by cost control initiatives taken by the management. Hence, we reiterate our BUY rating on the stock with a rolled forward target price of Rs. 1,724 based on 19x FY24E adj. EPS.

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