Tech Mahindra's Q1FY19 results (Outperformer) - CC Revenues/EBITDA Beat
Q1FY19 results highlights
- Quarterly performance beats expectation: Reported revenue de-growth of -1.6%/+7.6% qoq/yoy to US$1224m (IDFCe: US$1223m).CC revenues growth of 0.3% vs. IDFC: -0.5% qoq. EBIT margins down 82bp qoq to 13.0% (IDFCe:12.8%) led by operational efficiencies. Reported EPS de-grew 27% qoq to Rs10.8 (IDFCe.:Rs10.1) on lower forex income. TCV win of ~US$270m+ in Q1FY19.
- Enterprise business continues strong momentum: Growth was led by enterprise business (3.8% qoq CC) & communications revenues were down sequentially (-4.5% qoq CC). Margin performance is good considering part wage hikes in the quarter and decline in Telecom vertical. Tech Mahindra (TechM) continues to push efficiencies and and utilisation (excl. trainees) was maintained at 84%.
- Margin delivery holding up, growth execution needs to get better: TechM EBIT margin improvement is tracking tad better than expectations led by operating efficiencies and turnaround in subsidiary performance. While soft margin levers such as utilisation seem to be peaking, growth will be a potential lever. Management is expecting strong deal flow in communication vertical which should translate in better growth in coming quarters.
Key positives: CC and better margin performance
Key negatives: Weak revenue growth in communications.
Impact on financials: FY19E/FY20E EPS downgraded by 4.7%%/2.4% to factor lower other income.
Valuations & view
Tech Mahindra has executed well on the margins despite challenges in the communications vertical. Enterprise execution continues to be good and that provides cushion for overall growth. While growth execution has been a little volatile due to high vertical concentration (Telecom), rather inexpensive valuations (13x FY20E) keep us constructive on the name. We are adjusting down our Rs-EPS estimates by -4.7%/-2.4% for FY19E/FY20E to factor in lower other income. Maintain Outperformer, with a March 2019 target price of Rs760 (15.5x FY20E EPS).
Tech Mahindra Limited is engaged in the business of computer programming, consultancy and related services. The Company's segments include Information Technology (IT) Services and Business Processing Outsourcing (BPO). The Company operates in various sectors, including telecom business and enterprise solutions business. The telecom business provides consulting-led integrated portfolio services to customers, which are telecom equipment manufacturers, telecom service providers and IT infrastructure services, and BPO, as well as enterprise services (banking, financial services and insurance (BFSI), retail and logistics, and manufacturing, among others) of IT and IT-enabled services delivered through a network of various locations around the world. The enterprise solutions business provides IT services, including IT enabled services, application development and maintenance, consulting and enterprise business solutions, extended engineering solutions and infrastructure management services.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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