IGI Logo

TECHM posted a healthy operating performance in 2Q. Revenue grew 2.0% qoq to $1.69bn (2.4% CC; organic 2.3% CC), above our estimate of $1.68bn. Revenue growth was largely driven by Communications (Orange deal ramp up; ~94% of incremental revenue sequentially), while Enterprise grew 0.1% qoq. EBITM expanded ~40bps qoq to 14.8%, aided by volume growth, savings from Project Fortius, and currency, though partly offset by wage hikes. Deal intake remained strong, with TCV of $1.02bn in 2Q (fourth consecutive quarter of >$1bn TCV) and ~$4.3bn on a TTM basis, supported by broad-based demand across verticals and geographies. Revenue from $20mn+ accounts continues to outpace the company’s overall growth, driven by increased multi-product sales and market-share gains. The management expects gross margin expansion opportunities to continue to play out in 2H and beyond, through AI-led productivity improvements and pyramid rationalization. We raise our FY27-29E EPS by 1.2-2.4%, factoring in the 2Q performance. We retain REDUCE while increasing TP by ~3% to Rs1,500 (from Rs1,450) at 16x Sep-28E EPS.

Results summary

TECHM reported revenue of $1.69bn, up 2.0% qoq (2.4% CC), above our expectation of $1.68bn. IT Services revenue was up 1.7% qoq, while BPS grew 3.3% qoq in dollar terms. EBITM expanded ~40bps qoq to 14.8%, above our expectation of 14.2%. Total headcount was up 3.7% qoq to 152,206 (IT headcount up ~2.6%), partly due to an employee transfer under the Orange deal. LTM attrition was down 10bps to 11.7%. The company has announced a bonus issue of 1:1 and an interim dividend of Rs15/share. What we liked: Operating performance beat and healthy deal intake. What we did not like: Weak cash conversion (~53% in 2Q), softness in BFSI.

Broad-based geo growth; ex-Manufacturing, all verticals grow sequentially

Across verticals, revenue growth was led by Retail, Transport, and Logistics (9.6% qoq), Communications (6.0%), Technology, Media and Entertainment (2.8%), HLS (1.4%), and BFSI (0.4%), partially offset by a decline in Manufacturing (-3.9%) and others (-15.0%). Among geographies, Europe, Americas, and ROW grew 2.5%, 1.9%, and 1.6%, respectively, in dollar terms.

AI deflation concerns, pricing pressure, and demand outlook

The management expects AI to expand service opportunities through broader scope and better outcomes, despite potential pricing pressure from automation and cheaper models. Token costs remain immaterial to most client budgets, while cloud and hardware costs have been the bigger pressure. Industry price compression is driven mainly by competition rather than AI budget diversion. Further, moderation in AI infra spending could benefit services budgets. For 2H, the management expects normal seasonality, with continued weakness in European auto manufacturing (manageable within the existing portfolio).

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354