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Result Synopsis

Tech Mahindra (TECHM) reported muted financial performance for the quarter. The sequential revenue growth and EBIT margin were inline with expectation. Revenue increased by 1.1% QoQ in cc terms. (up 1.8% QoQ in INR terms, up 1.1% QoQ in USD terms), led by Manufacturing segment (up 3.4% QoQ). There was sequential improvement in EBIT margin (up 65 bps QoQ) on lower cost of services. Employee attrition continues to moderate as LTM attrition was down ~1 percentage points QoQ to 10%.

The near term demand environment remains challenging as the clients remain cautious regarding the evolving macroeconomic situation and that is reflected in slowdown in discretionary spending and it continues to impact near term revenue performance. The continued weakness in Telecom vertical is expected to result in muted revenue growth for FY24. Falling employee attrition, improving employee pyramid and focus on better revenue mix is expected to support operating margin going ahead. We estimate revenue CAGR of 10.7% over FY23?26E with average EBIT margin of 11.0% over the period. We maintain our NEUTRAL rating on the stock with revised target price of Rs 1,435/share at 22.6x on FY26E EPS. The stock trades at PER of 20.8x/22.2x on FY25E/FY26E EPS.

Result Highlights

Reported revenue of Rs 131.0bn (up 1.8% QoQ in INR terms, up 1.1% QoQ in USD terms). The performance of various verticals includes Manufacturing (up 3.4% QoQ), CME (down 0.2% QoQ), BFSI (down 2.6% QoQ), TME (down 3.4% QoQ) and Retail & Transport (up 6.1% QoQ), other vertical (up 9.3% QoQ). Overall, the revenue increased by 1.1% QoQ in cc terms.

 EBIT margin increased by 65 bps QoQ to 5.4%, led by higher revenue and decrease in Cost of Services (down 0.1% QoQ). ? Signed net new deals of $381mn vs $640mn in Q2FY24 and $795mn in Q3FY23.

Osffshore effort mix was up 50 bps QoQ to 73.9%. Total number of Active clients decreased by 24 QoQ to 1228.

Total headcount decreased by around 4,354 QoQ to 146,250. LTM attrition was down 1.0 percent points QoQ to 10%. Utilization excluding trainees was up 200 bps QoQ to 88.0%.

KEY CON-CALL HIGHLIGHTS

 Tech Mahindra announced the appointment of Richard Lobo as the Chief People Officer (CPO). It also appointment of Peeyush Dubey as the Chief Marketing Officer (CMO).

 Tech Mahindra was selected as a strategic IT and Transformation partner by a prominent Life and Annuities provider in North America.

 No near-term bounce back visible in CME vertical. CME vertical is witnessing headwinds and remains sluggish.

 Manufacturing vertical witnessed uptick due to increase spending by clients in automotive ER&D.

 Insurance vertical grew sequentially and shows signs of uptick, however, BFS is dragging down the overall vertical.

 Europe geography grew 2.0% QoQ whereas Americas geography decreased by 1.5% QoQ during Q3FY24.

 Reduced subcon cost and employee pyramid restructuration supported the margins for the quarter.

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