MOSL: TECH MAHINDRA (Buy)-Good show on profitability-Visibility on further improvement remains strong too
Tech Mahindra: Good show on profitability; Visibility on further improvement remains strong too
(TECHM IN, Mkt Cap USD8.9b, CMP INR605, TP INR700, 16% Upside, Buy)
- In-line revenue driven by IP and BPO: 3QFY18 revenue grew 2.5% QoQ to USD1,209m. While Communication was flattish (+0.4% QoQ), Enterprise was strong with growth of 4.7% QoQ. Growth in 3Q was driven by [1] Addition of revenue from the IP deal struck last quarter (~1pp, in our view) and [2] Strong growth in BPO (1.3pp), marking the second quarter of double-digit sequential growth in BPO.
- Profitability recovery visible: This was the third straight quarter that TECHM saw a reduction in Software Professionals headcount (-9% YoY), aiding margin expansion. Higher utilization (now at 83%) and revenue from the IP deal provided additional support. EBITDA margin expanded 170bp QoQ to 16.3%, a beat of 100bp. PAT of INR9.4b grew 12.8% QoQ (est. of -12%), mainly due to the profitability beat, higher other income, and lower ETR.
- Communications outlook optimistic, but beyond 2018: In 9MFY18, revenue in Communication would have grown by ~4% ex. LCC (-0.5% otherwise) and in Enterprise would have clocked ~11% ex. acquisitions (19% otherwise). Assuming LCC is steady and the rest of the business sees continued momentum, the company is on track to achieve 9.5% growth in FY19. It also appears set to deliver further margin expansion, fuelled by an improvement in subsidiaries and a strong exit rate (thanks to Comviva seasonality). Beyond this, there is upside risk on growth estimates in Communication, given the increasing focus of service providers on launching 5G.
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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