IDFC Securities - Tech Mahindra Limited (TECHM) Tech Mahindras Q3FY19 results (Outperformer) - Impressive on all fronts

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IDFC Securities

Tech Mahindra's Q3FY19 results (Outperformer) - Impressive on all fronts

Q3FY19 results highlights

Strong Revenue & Margin performance: Reported revenue grew by -3.5%/+4.3% qoq/yoy to US$ 1260m (IDFCe: US$1242m).CC revenues growth of 4.3% vs. IDFCe: 2.6% qoq. Enterprise vertical posted strong growth this quarter (up 4.2% qoq,7.4% yoy), followed by growth in communication vertical (up 2.5% qoq,0.1% yoy). EBIT margins were up 75bp qoq to 16.1% (IDFCe:15.5%) led by operational efficiencies. Reported EPS grew by 13.0% qoq to Rs13.5 (IDFCe.:Rs12.6) due to strong EBITDA beat. TCV of ~US$440m ( US$ 240mn : Communication, US$ 200mn: Enterprise) vs TCV win of ~US$550m+ in Q2FY19.
Strong growth in Enterprise vertical: Growth was led by enterprise vertical business (4.2 % qoq dollar terms) & communication revenues were up sequentially (2.5% qoq dollar terms). Digital revenue accounted to 33% of the total revenues (10% sequential growth). In enterprise vertical, manufacturing vertical showed a strong growth of 5.6% qoq and we expect the growth momentum to continue in enterprise vertical.
Margin delivery holding up, growth execution is better across verticals: TechM EBIT margin improvement is tracking tad better than expectations led by operating efficiencies and strong performance in communication vertical now followed by enterprise vertical. Management expects SG&A to average around 14% in FY19E. Management is expecting strong growth momentum to maintain in communication vertical & enterprise vertical.

Key positives: Strong performance in enterprise vertical.

Key negatives: Weak revenue growth in Europe.

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

Valuations & view

Tech Mahindra has executed well on all the verticals in this quarter. Strong growth come back in Enterprise vertical gives us confidence that Tech M will able to maintain the earnings momentum ahead. Communication execution continues to be good and that provides more cushion for overall growth. Improving mix of business, strong revenue growth with potential of acceleration and expansion in margin with inexpensive valuations of (14x FY20E) keep us constructive on the name. We have maintained our EPS estimates & Outperformer rating, with a December 2019 target price of Rs830 (15.8x FY20E EPS).

06/02/2019 8 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

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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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