MOSL: TECH MAHINDRA (Buy)-Déjà vu: Significant margin miss (excluding one-offs)
​Tech Mahindra: Déjà vu: Significant margin miss (excluding one-offs)
(TECHM IN, Mkt Cap USD6.3b, CMP INR427, TP INR500, 17% Upside, Buy)
- Pricing takes its toll on margins: The unexpected 370bp QoQ collapse in 4QFY17 EBITDA margin to 12% (est. of 15.4%) defined a disappointing quarter for TECHM. However, this was not the first such instance of margins disappointment in the recent past, with 4QFY15 and 1QFY17 exhibiting similar negative shocks. Even though restructuring of LCC had a one-time impact of ~180bp, we note that ~130bp came from the renegotiation of legacy contracts, which needs to be compensated by productivity improvements over the coming quarters. Due to the margin miss, PAT declined 31.5% YoY to INR5.9b (est. of INR7.3b).
- In-line revenue; Enterprise shines again: CC revenue grew 0.9% QoQ (in-line), and cross-currency tailwinds facilitated USD revenue growth of 1.4%. Telecom declined 0.8% QoQ and Enterprise grew 3.5% QoQ. FY17 USD revenue growth was 7.8%, where Telecom declined by 1%, but Enterprise surged 17% aided by inorganic growth (Target, Pininfarina, Bio).
- Any recovery shall only be visible in 2Q: Exiting on a low base, TECHM faces the usual 1Q headwinds of visa expenses and Comviva margin contraction, compounded with a full-quarter impact of stronger INR this time. While pyramid, productivity in legacy segments and cost efficiencies are levers to margins, any improvement will only start reflecting from 2QFY18.
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.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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