IDFC Securities - Tech Mahindra Limited (TECHM) Tech Mahindras Q2FY19 results (Outperformer) - Strong margin performance

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IDFC Securities

Tech Mahindra's Q2FY19 results (Outperformer) - Strong margin performance

Q2FY19 results highlights

Tepid revenue performance due to healthcare vertical: Reported revenue de-grew by -0.5%/+3.3% qoq/yoy to US$ 1218m (IDFCe: US$1236m).CC revenues growth of 0.4% vs. IDFCe: 1.7% qoq. Revenue growth was tepid this quarter due to de-growth in healthcare business as some projects ended in 3-4 hospitals. Healthcare business caused a loss of 40mn in Q2FY19. EBIT margins were up 234bp qoq to 15.3% (IDFCe:14.4%) led by operational efficiencies. Reported EPS grew by 18.5% qoq to Rs11.9 (IDFCe.:Rs11.3) due to strong EBITDA beat. TCV of ~US$550m ( US$ 300mn : Communication , US$ 250mn: Enterprise) vs TCV win of ~US$270m+ in Q1FY19.
Communication business to maintain strong momentum: Growth was led by communication business (5.1 % qoq CC) & enterprise revenues were down sequentially (-3.6% qoq CC). Management mentioned that deal momentum is strong in communication vertical & 2HFY19 will be better than 1HFY19 , historically 2H of the year is better for Tech M.
Margin delivery holding up, growth execution needs to get better across verticals: TechM EBIT margin improvement is tracking tad better than expectations led by operating efficiencies and strong performance in communication vertical. Management has also hired new front end sales team. Management is expecting as bottom for enterprise vertical & strong deal flow in communication vertical which should translate in better growth in coming quarters.

Key positives: Strong performance in communication vertical.

Key negatives: Weak revenue growth in enterprise vertical.

Impact on financials: EPS unchanged for FY19E/FY20E/FY21E

Valuations & view

Tech Mahindra has executed well on the margins despite challenges in the enterprise vertical. Communication 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 (enterprise), rather inexpensive valuations (13.4x FY20E) keep us constructive on the name. We are maintain our EPS estimates & Maintain Outperformer, with a December 2019 target price of Rs830 (15.8x FY20E EPS).

31/10/2018 9 EN

Underlying

Tech Mahindra Limited

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.

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INE669C01036 National Stock Exchange of India India

Provider

IDFC Securities

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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