Neutral Tech Mahindra Ltd For Target Rs.1,850 by Motilal Oswal Financial Services Ltd
Another step in the right direction
Execution continues to be on track despite growth challenges
* Tech Mahindra (TECHM) reported 3QFY25 revenue of USD1.5b, up 1.2% QoQ in constant currency (CC) vs. our estimate of flat CC growth. Healthcare/BFSI led the growth (+4.5%/2.7% QoQ CC), while Communications and Technology were muted on CC basis. EBIT margin was up 60bp QoQ at 10.2%, beating our estimate of 9.7%. Adj. PAT stood at INR9.8b (down 21.4% QoQ but up 36.8% YoY), in line with our estimate of INR10b. For 9MFY25, revenue/EBIT/PAT grew 1.2%/24.2%/16.3% vs. 9MFY24. We expect revenue/EBIT to grow by 5.2%/35.9%, but PAT to decline by 4.7% YoY in 4QFY25. Net new deal TCV was USD745m, up 23% QoQ/95% YoY. We value TECHM at 25x FY27E EPS with a TP of INR1,850 (11% upside). We reiterate our Neutral rating on the stock.
Our view: Disciplined execution continues
* FY27 EBIT margin dreams looks more and more real: We believe TECHM’s Phase 1 transformation is progressing well, with EBIT margins likely to grow to 12.5% by FY26E. The period from FY26 to FY27 may bring renewed margin pressures across the industry, including rising attrition rates, high costs associated with backfilling roles, and increasing demand for specialized talent. While this implies some risk to management guidance for FY27, the market could continue to reward TECHM for staying on course and directionally progressing well.
* We await further signs of recovery in Communications and Automotive: Client spending recovery remains slightly muted in TECHM's two biggest verticals, Telecom and Automotive/Manufacturing (~50% of revenues). The margin expansion trajectory now looks quite reassuring, and we would turn constructive on the stock if we see improved spending patterns in Automotive and Communications.
* Market’s faith in the new management being vindicated: We believe that despite the challenges, the new management has repaid the initial faith in its ability to engineer a turnaround. TECHM could be valued at a higher multiple to its historical average. Our target multiple of 25x FY27E EPS is at a 10% discount to Infosys, as we pencil in superior execution in an improving demand environment.
Valuation and change in estimates
* We adjusted our FY25 estimates to account for the impact of wage hikes in 4Q and raised our FY27 projections, reflecting steady directional progress. We expect FY25/FY26/FY27 EBIT margins at 9.4%/12.4%/13.6%, which will result in a 22% CAGR in INR PAT over FY24-27. Beat on revenue and margins; Healthcare led growth; deal TCV up 23% QoQ
* Revenue stood at USD1.5b, up 1.2% CC (down 1.3% in USD terms), beating our estimates of flat CC growth.
* IT service /BPO declined 1.0%/3.3% QoQ.
* Healthcare/BFSI led the growth (+4.5%/2.7% QoQ CC), while Communications and Technology were muted on CC basis. Manufacturing fell 2.5% QoQ CC.
* EBIT margin was up 60bp QoQ at 10.2%, beating our estimate of 9.7%.
* Net employee addition: 3,785 (down 2.5% QoQ). Utilization (excl. trainees) was down by 70bp at 85.6%. LTM attrition was up by 60bp at 11.2%.
* Net new deal TCV was USD745m, up 23% QoQ/95% YoY. ? Adj. PAT stood at INR9.8b (down 21.4% QoQ but up 36.8% YoY), in line with our estimate of INR10b.
* FCF conversion to PAT stood at 172% vs. 106% in 2Q.
Key highlights from the management commentary
* TECHM is focused on enhancing its capabilities and optimizing its revenue mix to achieve better pricing outcomes.
* The company anticipates that CY25 will show better performance than CY24.
* There is substantial headroom for growth within the partner ecosystem, with much of the growth expected to come from partnerships with hyperscalers and independent software vendors (ISVs).
* The net new TCV was USD745m in 3Q, up 23% QoQ and 95% YoY. Many deals originate from prioritized verticals and regional markets, with a focus on securing qualitative, large-scale agreements.
* EBIT margins improved to 10.2%, up 60bp QoQ, driven by operational leverage and cost optimization under Project Fortius.
* Wage hikes planned for 4QFY25 could impact margins by 100-150bp. ? Despite adding freshers, the overall headcount decreased due to its focus on optimizing costs through fixed-price contracts.
Valuation and view
* We remain positive about the restructuring at TECHM under the new leadership and believe this quarter was another step in the right direction. But we expect the impact from these steps to be visible gradually. Further, TECHM’s presence in the Communications segment, which remains under notable duress, makes the new management’s job much harder. We remain on the sidelines, as we believe the current valuation fairly factors in the uncertainties around growth and margin. We value TECHM at 25x FY27E EPS with a TP of INR1,850 (11% upside). We reiterate our Neutral rating on the stock.
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
