MOSL:TECH MAHINDRA (Buy)-Steeper-than-anticipated challenges at the start of the year-Revenue headwinds to add margin woes

​Tech Mahindra: Steeper-than-anticipated challenges at the start of the year; Revenue headwinds to add to margin woes in 1Q

(TECHM IN, Mkt Cap USD5.7b, CMP INR388, TP INR465, 20% Upside, Buy)

Following our interaction with Tech Mahindra (TECHM) management, we see the start of FY18 marred with challenges as revenue headwinds compound profitability stress. Key highlights:

Offsets to revenue headwinds missing in both Communications and Enterprise

• ​Seasonality in the products segment (Comviva), continued rationalization of the LCC portfolio and tail effect from ramp-down in an account were all known headwinds to Communications revenue in 1QFY18. However, we do not expect any offsets alleviating the impact.
  
• Even the Enterprise segment has revenue gap to fill from the transformation projects that ended in 4QFY17, and any offsets there too may have to wait at least for a quarter.
  

We revise our 1Q estimates and consequently forward numbers

• ​We were earlier modeling 4.4% QoQ growth in USD revenues from: [1] 1% CC organic growth, [2] 2.5% from HCI integration and [4] ~90bp benefit from cross-currency movements.
  
• However, we now model 1.3% decline in dollar revenues (5.7% cut). This models organic CC revenue decline of 3.4% QoQ from headwinds in both the business segments. 1QFY18 will only account for two months of revenues from the integration of HCI acquisition.
  
• In line with management commentary, we build a partial recovery on the growth front starting 2QFY18, culminating in FY18/FY19 revenue estimates cut of 3.3%/2.0%. Consequently, our earnings estimates are lower by 5.7%/2.6%, partially also on the back of modeling a stronger INR.