IGI Logo

Approximating turnaround tarmac

All-round beat driven by Manufacturing   

Tech Mahindra (TECHM IN) reported revenue growth of 1.2% QoQ USD, beating our/street estimates of 1.4/1% QoQ decline. This was partially due to one-time pass-through and service revenue contributing ~1%. Similar was the case with margin – Q3 EBIT margin was 5.4%, ahead of our/street estimates of 4.8% each. We reckon Q3 to be the one to mark a turn-around for TECHM under Mohit Joshi’s (CEO) regime. Growth was led by strong traction in Manufacturing (up 2.9% QoQ USD; traction continuing since the past three quarters), retail (6.1%) and others (9.1%). Telecom, technology and BPO continued to be weak. Europe and RoW saw a turnaround.

Margin improvement – Key positive

EBIT margin was at 5.4%, up 80bps QoQ versus our estimate of 4.8% and median consensus estimate of 5.5%, aided by utilization improving by 200bps QoQ and 150bps from lower employee cost. SG&A was up ~110bps QoQ, in contrast with most results announced yet. Margin also carried one-time impact of ~160bps from contract termination of long-tail, low-margin accounts. Also, EBITDA margin for IT Services improved 84bps QoQ. Adjusted EBIT margin was 7%. TECHM's new strategy focused on improving margins via subcontracting cost reduction, value-based pricing and pyramid rationalization.

Three-pronged strategy already in force

Mohit Joshi’s three-pronged strategy to improve long-term outlook includes: 1) better revenue growth by improving engagement in top accounts (lacking so far); revamping engagements with smaller accounts, 2) margin improvement, via centralized delivery model and 3) building organization structure (to high agility and robust processes).

Valuations: Retain BUY; TP revised to INR 1,660

We factor in Q3 print and raise FY25E/26E EPS 7%/6% as we expect FY25 to a turnaround year with internal issues being sorted out. Expect USD sales/ EBIT/PAT CAGRs of 5.3%/12.7% / 12.4% in FY23-26E. We retain Buy with raised TP of INR 1,660 from INR 1,360, on 20.7x (five-year average + 1sd; from 18.3x earlier, on a quick show of results) Dec-25E EPS. 

Please refer disclaimer at Report
SEBI Registration number is INH000000933