IDFC Securities - Tech Mahindra Limited (TECHM) Tech Mahindras Q4FY18 results (Outperformer) - Good execution continues

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IDFC Securities

Tech Mahindra's Q4FY18 results (Outperformer) - Good execution continues

Q4FY18 results highlights

Quarterly performance beats expectation: Reported revenue growth of 2.9%/10% qoq/yoy to US$1244m (IDFCe: US$1235m). Constant currency revenues grew 1.7% qoq vs. IDFCe 1% qoq. EBIT margins up 108bp qoq to 13.8% (IDFCe:13.4%) led by operational efficiencies. Reported EPS grew 29.6% qoq to Rs13.74 (IDFCe: Rs10.75) – led by higher EBIT, other income and lower tax. TCV win of ~US$300m+ in Q4FY18.
Enterprise business continues strong momentum: Growth was led by enterprise business & communications revenues were flat sequentially – a negative surprise. TechM has won couple of deals in the telecom space (one transformational deal). Among geographies, growth was led by North America (+4% in USD terms qoq). Tech Mahindra (TechM) continues to push efficiencies and net headcount fell by 2,434 to 112,807 and utilisation moved up 100bps qoq to 84%. In Q4FY18, client bucket movement was strong with 4 additions in the US$20+ bucket. DSOs (including unbilled) stood at 102 vs. 105 in Q3FY18.
Delivery on margins continues: TechM EBIT margin improvement is tracking ahead of expectations led by operating efficiencies and turnaround in subsidiary performance. While soft margin levers such as utilisation seem to be peaking, weaker INR and further improvement in subsidiary performance should drive further uptick.

Key positives: Margin expansion

Key negatives: Weak revenue growth in communications.

Impact on financials: FY19E/FY20E EPS upgrade by 6.6%/9.4%.

Valuations & view

Tech Mahindra has executed well on the margins despite challenges in the communications vertical. We expect revenue growth to pick-up gradually as incremental drag from communications eases into FY19E. We are factoring ~7.7% USD revenue CAGR (FY18E-20E) - primarily enterprise led. We think TechM remains levered to a weaker INR given headroom for margins and valuations (14x FY20E) aren’t prohibitive. Reiterate Outperformer, with a revised March 2019 target price of Rs785 (15.5x FY20E EPS) vs. Rs670 earlier.

28/05/2018 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

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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