IGI Logo

Growth moving up a gear FY27 growth visibility improves; margins on track

* Tech Mahindra (TECHM) reported 1QFY27 revenue of USD1.7b, up 2.6% QoQ in CC, above our estimate of 1% CC growth. Retail/BFSI/Manufacturing rose 1.2%/2.7%/9.0% QoQ, while Technology/Communication declined 1.7%/1.3% QoQ (in USD terms). EBIT margin was up 60bp QoQ at 14.4%, in line with our estimate of 14.3%.

* Adj. PAT stood at INR15b (up 8.2% QoQ/28.5% YoY), below our estimate of INR18b. NN deal TCV of USD1,078m was up 0.5% QoQ/up 33.3% YoY. ? In INR terms, revenue/EBIT/adj. PAT grew 17.7%/53.3%/28.4% YoY in 1QFY27. In 2QFY27, we expect revenue/EBIT/adj. PAT to grow by 13.6%/33.7%/54.2% YoY. We value TECHM at 20x FY28E EPS with a TP of INR1,900 (26% upside) and reiterate our BUY rating. TECHM remains our preferred pick among large-cap IT companies.

Our view: Deal ramp-up provides near-term growth momentum

* Strong results in a seasonally weak quarter; above-peer growth looks increasingly achievable: We believe this quarter brings a material step-up in TECHM's growth trajectory, with growth expectations moving from ~3-5% to ~6-7% over the next couple of years. If this momentum sustains, it could warrant another round of re-rating. In this quarter, TECHM delivered strong results in a seasonally weak quarter, driven by strength across all key verticals. We believe this performance puts the company on track to be the fastest-growing company among large-cap IT names in FY27, with ~6-7% growth vs. ~2-3% for most large-cap peers.

* The company's execution in a tricky demand environment has been commendable. Despite potential sequential softness in auto after the strong 1Q performance, we expect the ramp-up of recently won telecom deals, along with continued strength in BFSI, to help keep the growth momentum intact. Management also reiterated its confidence in delivering above-peer growth in FY27.

* Vertical mix improving: Communications, which was a drag on revenue over the past two years, is now becoming a tailwind. Management expects further improvement as one of the recently won telecom deals starts ramping up from 2Q. BFSI continues to see healthy demand in payments modernization and wealth platforms, and Manufacturing remains supported by aerospace, though auto could moderate after the accelerated European program in 1Q. Overall, growth is becoming more broad-based across verticals.

* Margins continue to expand; 15% target now in sight: EBIT margin expanded for the 11th consecutive quarter to 14.4%, keeping the company on track to achieve its FY27-exit margin target of ~15%. While phased wage hikes from 2QFY27 and continued investments in AI remain near-term headwinds, management continues to see room for further margin improvement. We, therefore, keep our margin estimates broadly unchanged and build in 14.8% EBIT margin for FY27.

* Anchor client growth remains one to watch: Growth remained soft across the top-5, top-10 and top-20 client buckets, suggesting that spending from some of the larger accounts is yet to recover meaningfully. While management indicated no unusual deal ramp-up delays or contract cancellations, sustained recovery in anchor client spending remains an important monitorable for growth beyond the current large-deal ramp-up cycle.

* We meaningfully raise our revenue estimates; EPS largely unchanged: We meaningfully upgrade our revenue estimates (7.1%/7.6% YoY CC now vs. 4.6%/5.2% YoY CC earlier for FY27E/FY28E) to reflect better-than-expected execution and improving growth visibility. However, our margin estimates remain broadly unchanged, while hedging losses largely offset the earnings upgrade, resulting in minimal change to our EPS estimates

Valuation and view

* The ongoing turnaround under the new leadership continues to track well and this quarter was another step in the right direction. With above-peer growth looking increasingly achievable, we continue to like TECHM's bottom-up turnaround story.

* We raise our FY27E/FY28E organic CC revenue growth estimates to 7.1%/7.6% (vs. 4.6%/5.2% earlier), reflecting stronger-than-expected execution, healthy deal ramp-ups and improving growth visibility. However, we keep our FY27E EBIT margin estimate broadly unchanged at 14.8%. Consequently, hedging losses largely offset the earnings upgrade, resulting in minimal change to our EPS estimates. We value TECHM at 20x FY28E EPS with a TP of INR1,900 (26% upside) and reiterate our BUY rating. TECHM remains our preferred pick among large-cap IT companies.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412