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MOSL: TECH MAHINDRA (Buy)-Enterprise growth drives all-round performance

TECH MAHINDRA: Enterprise growth drives all-round performance

(TECHM IN, Mkt Cap USD10.6b, CMP INR773, TP INR910, 18% Upside, Buy)

• Revenue outperformance: For 2QFY20, TECHM's revenue grew 7.3% YoY CC (v/s estimate of +4.8% YoY), EBIT declined 12.4% YoY (estimate of -18.4% YoY) and PAT increased 5.6% YoY (estimate of -10.8% YoY). Higher deal wins in the Enterprise segment led to the revenue outperformance. EBIT margin expanded 130bp QoQ to 12.8%, a 60bp beat to our estimate of 12.2%. However, during the quarter, SGA had a one-time gain of ~INR720, adjusting for which the EBIT margin was largely in line with our estimate. PAT was INR11.2b, up 17.2% QoQ, a 18.5% beat to our estimate, mainly due to the operational beat and the one-time tax refund, which led to ETR of 16.9% (est. of 25%).
• Positive surprise on Enterprise: Enterprise segment, which was in mist for the past few quarters, grew significantly by 5.6% QoQ CC. This was led by a few large wins in the segment. Growth was broad based across Hi-tech (+10% QoQ), Retail (+16.5% QoQ), BFSI (+4.8% QoQ) and Others (+11% QoQ CC). The only exception was Manufacturing, which declined 4.2% QoQ, led by weakness in Auto segment (loss of contract in subsidiary Pininfarina). Going forward Enterprise should see steady growth on account of USD490m deal wins in the segment, as against the average TCV run-rate of USD200-250m. Further, TechM expects the decline in revenues from Manufacturing to bottom out next quarter onward.
• Valuation view: We have increased our EPS estimates for FY20/21 by 5%/8.4%, led by an all-round beat in the quarter and higher growth expectations in the Enterprise segment. We estimate 250bp YoY contraction in margins, led by the steep margin decline in 1Q and higher transition cost associated from the larger deal in the telecom segment. However, we expect cost-optimization levers to kick in once the transition cost is complete for the AT&T deal. For FY20, revenue growth in Telecom segment should reflect overall growth of larger peers, while Enterprise should be a tad below it. Over FY19-21, we expect USD revenue CAGR of 8.1% and earnings CAGR of 9.5%. Our TP of INR910 (18% upside) discounts forward earnings by 15x. Maintain Buy.