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Healthy growth momentum with new deal wins

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

* Q2FY22 sales up 16.1% YoY to Rs. 10,881cr, driven by growth in BPO segment (+37.1% YoY) and IT segment (+13.7%).

* EBITDA grew 17.2% YoY, as EBITDA margin inched up 10bps YoY to 18.3% supported by improved product mix and controlled operating costs. PAT rose 25.7% YoY further helped by lower D&A and interest.

* Company is expected to fare better on the back of continued new deals growth momentum and traction in communication business led by 5G investments and digital and legacy modernization. Hence, we reiterate our BUY rating on the stock with a revised target price of Rs. 1,857 based on 24x FY23E adj. EPS.

All round segmental growth drives revenue

In Q2FY22, revenue registered 16.1% YoY growth to Rs. 10,881cr, mainly driven by healthy growth in BPO segment (+37.1% YoY to Rs. 1,306cr) and IT business (+13.7% YoY to Rs. 9,596cr). Company’s commitment to customer experience management continued to showresults in all the key growth verticals with CME business up by 6.7% YoY and the Enterprise vertical up by 6.3% YoY.

Within the Enterprise space, both BFSI and HLS verticals saw strong new deal wins resulting in total contract value of USD 750mn in the quarter. The quarter witnessed a sequential dollar revenue growth of 6.4% as currency headwinds up 80bps on a QoQ basis.

Operating metrics remain strong

EBITDA grew 17.2% YoY to Rs. 1,995cr in Q2FY22, as EBITDA margin improved 10bps YoY to 18.3% aided by better service mix. EBIT was also up 24.1% YoY to Rs. 1,652cr as EBIT Margin remained flat on a sequential basis at 15.2% due to increased operating and employee costs.

The quarter ended with PAT of Rs. 1,339cr (+25.7% YoY). It is noted that, the quarter also saw one-off tax charge in one of the company’s subsidiaries leading to a higher tax rate at 29.4% (vs. 24% in Q1FY21). As a result, net profit margin dipped 100bps QoQ to 12.3% at the end of the quarter.

Key concall highlights

* Management announced interim dividend of Rs. 15 per share which is in-line with the company’s dividend capital allocation policy.

* Company announced the acquisition of Lodestone; this combination aids Tech Mahindra in scaling some of the OPD and digital product engineering business and achieve synergy.

* Update on the headcount - the company recruited ~15,000 employees in the quarter, as a result of which utilization dipped about 1%.

Valuation

Tech Mahindra is expected to fare better on the back of continued new deals growth momentum and traction in communication business led by 5G investments and digital and legacy modernization. Management believes that the digital transformation wave is necessity post-pandemic era and new deals are expected to drive multiyear growth. Hence, we reiterate our BUY rating on the stock with a revised target price of Rs. 1,857 using a target multiple of 24x FY23E adj. EPS.

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