MOSL: TECH MAHINDRA-LCC may continue to drag Communications vertical-Driving some moderation in our earnings estimates
​Tech Mahindra: LCC may continue to drag Communications vertical; Driving some moderation in our earnings estimates
(TECHM IN, Mkt Cap USD7.0b, CMP INR468, TP INR550, 17% Upside, Buy)
We interacted with management of Tech Mahindra (TECHM). Key highlights:Telecom (47% of revenue) recovery is expected to be impacted by: [1] further pruning of business in LCC and [2] Impact from sluggishness in one of the top clients. We expect low-single-digit growth in Communications in FY18.Traction in Enterprise, on the other hand, continues to be on track, and the company should deliver above-industry growth in this segment.Margins are expected to be flat, despite wage hike deferral and trimming of the non-profitable business in LCC, due to softness in Communications vertical.
Gradual recovery in Telecom takes a pause: Telecom has been seeing steady organic revenue performance (ex-LCC) over last four quarters. Outlook of improving traction in the vertical has been reflecting in commentary and performance of peers too. TECHM is well placed to benefit from any secular uptrend in the telecom sector, given its strong competitive positioning. However, issues in a large deal with a key customer have reduced the velocity of this recovery, compounded by further pruning of business from LCC.
Issues in LCC not behind yet: The revenue run-rate in LCC since acquisition has come down significantly from USD430m. This is expected to further deteriorate as the company intends to let go off some of the non-core geographies and non-scalable/low-yield accounts. This would result in continued pressure on the vertical, driving our estimate of low-single-digit growth in Telecom in FY18E.
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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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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