Neutral Tech Mahindra Ltd For Target Rs1,110 - Motilal Oswal Financial Services Ltd
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* Tech Mahindra’s (TECHM) FY23 annual report highlights that the inflationary environment has led to a massive shift in tech spending by enterprises. The spending is now finding its way through conserving resources and optimizing costs.
* Enterprises continue to accelerate the adoption of new-age technologies to drive innovation and enable a new operating model for making it consumercentric and agile.
* For 5G technology, which is still emerging and relatively new, TECHM has established a leadership team in the space, and its 5G-related revenue crossed USD1b in FY23.
* In FY23, TECHM reported new deal TCV of USD2.9b (book-to-bill of 0.4x), with a major proportion of digital transformation projects. Given a delay in decisionmaking amid adverse macros, the conversion remains a challenge in the nearto-medium term.
FY23 growth aided by BPO
* In FY23, USD revenue grew 10.1% YoY, driven by the Enterprise business (+10.9% YoY). Within enterprise, growth was aided by Technology (+25.3%) and Retail (+11.9%).
* Revenue growth in the Communication, Media and Entertainment (CME) vertical (~40% of revenue) at 9% YoY was below consolidated revenue growth, due to structural weakness in the segment and deferral in 5G spending.
* In service lines, IT Services growth (~87% of revenue) was relatively weak at 8.6% YoY, while the BPO business (~13% of revenue) posted 22% YoY growth vs. 43% in FY22.
* Geography-wise, the Americas (~50% of revenue) outpaced other regions with 14.6% YoY growth, while Europe and ROW reported 4.7% and 7.4% YoY, respectively, in FY23.
Margins declined for both service lines
* TECHM reported adj. operating margin of 11.3% in FY23, down 320bp YoY. The margin contraction was mainly due to: 1) robust hiring in H1, added 12.7k employees, 2) intense compensation revision, and 3) elevated subcon % of revenue at 15%.
* Among segments, IT Services EBITDA margin stood at 14.7% in FY23 vs. 17.7% in FY22. Margin in the BPO segment stood at 17.5% in FY23 vs. 19.9% in FY22.
* Subcontractors’ percentage of revenue was 15% (down 60bp YoY). Subcontract expenses are expected to moderate gradually as more employees become part of the billing cycle.
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