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Turnaround around the corner, low hanging fruits around margins; Upgrade to ‘BUY’

We believe, EBIT margin improvement is a low hanging fruit for TechM’s new CEO Mr. Mohit Joshi; however, top line revival may take some time. That said, Mr Joshi’s opening gambit (appointment of COO Mr. Atul Soneja and an internal reshuffle) bolsters our conviction for a successful turnaround. On balance, we also take cognizance that this is contingent on improving capabilities and filling white spaces in non-communication verticals, which should start reflecting in deal wins and market share gains. TechM’s valuation looks stretched on consensus’ estimates. But, Mr Joshi’s initiatives playing out could form a strong premise for the stock to re-rate structurally. Given the backdrop, we increase our target multiple to 20x (earlier: 14x) and upgrade TechM to ‘BUY’.

TechM (28%) has outperformed NIFTY IT (17%) on a YTD-basis despite showing weak results over the past three quarters. From our recent discussion with TechM management, we believe that EBIT margin can improve to ~15– 16%, i.e. by ~500–600bps over FY24-26 vs. Street’s estimate of 13.2% in FY26. However, mired by soft demand in the telecom vertical and weaker capabilities in other verticals, top line revival will take some time. We assume 10%/13.3% YoY CC revenue growth for FY25e/26e. Our EPS estimate increase of 10%/24% rides largely on the back of stronger ~200/300bps FY25/26 EBIT margin boost.

We increase our target multiple to 20x (prior: 14x) as the first few steps in turnaround efforts by Mr. Joshi instils confidence given the: 1) appointment of COO Mr. Atul Soneja; and 2) internal re-shuffling of responsibilities (Link). However, much rests on improving capabilities and filling whitespaces in noncommunication verticals, improving incentive structure for sales, marketing and delivery operations team (yet to be decided by the board). This should start reflecting in deal wins and market share gains for TechM compared to competition

TechM’s valuation at 19x/17x looks stretched on consensus’ FY25/26 EPS estimates. But should the above steps find implementation under the new management, then the stock carries the potential for a structural re-rating. We are ahead of Street by 7%/16% on FY25/26EPS estimates. We value TechM on 20x one-year-forward EPS (Q5-Q8 EPS) of INR 78 to arrive at TP of INR 1,552 (prior: INR 910), implying ~20% potential upside. With this, we upgrade TechM to ‘BUY’ (prior: ‘SELL’)

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