Tech Mahindra's Q3FY18 results (Outperformer) - Margin execution tracking ahead of expectations
Q3FY18 results highlights
- Quarterly performance beats expectation: Reported revenue growth of 2.5%/8.3% qoq/yoy to US$1209m (IDFCe: US$1201m). EBIT margins up 180bp qoq to 12.8% (IDFCe:12.2%) led by operational efficiencies and improved performance in subsidiaries. Reported EPS grew 12.8% qoq to Rs10.6 (IDFCe.:Rs9) – led by higher EBIT and tax reversal of Rs2.2bn. TCV win of ~US$300m+ in Q3FY18.
- Enterprise business continues strong momentum: Growth was led by enterprise business & communications revenues were flat sequentially. Among geographies, growth was led by North America(+6.2% in USD terms QoQ). Tech Mahindra (TechM) continues to push efficiencies and net headcount fell by 1,984 to 115,241 and utilisation moved up 200bps qoq to 83%.
- Delivery on margins to support share price performance: 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, we still think that subsidiary performance has room for improvement. Management expects Q4FY18E of Comviva to show favourable seasonality. We are factoring in 60bps EBIT margin expansion over Q3FY18-20E.
Key positives: Margin expansion
Key negatives: Weak revenue growth in communications.
Impact on financials: FY19E/FY20E EPS upgrade by 1%/6.5%. FY18E EPS largely unchanged.
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 drag from communications eases into FY19E. We are factoring ~7.4% USD revenue CAGR (FY18E-20E). This along with margin improvement initiatives and reasonable valuations (13x FY20E) keep us constructive on the name. Reiterate Outperformer, with a revised March 2019 target price of Rs670 (14.5x FY20E EPS) vs. Rs610 earlier.
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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