MOSL: TECH MAHINDRA (Buy)-Operating performance marginally ahead; Telecom outlook encouraging

Tech Mahindra: Operating performance marginally ahead; Telecom outlook encouraging

(TECHM IN, Mkt Cap USD9.4b, CMP INR655, TP INR800, 22% Upside, Buy)

• 1QFY19 operating performance marginally ahead: TECHM's 1QFY19 CC revenue was flattish QoQ (+0.3%) and grew 6.9% YoY, better than our expectation of a 1.2% QoQ decline and 5.3% YoY growth. EBITDA of 16.4% (-110bp QoQ) was marginally better than our estimate of 16.0%; ~250bp of headwinds from wages, visas, Comviva and utilization were partly offset by currency and operational efficiencies. PAT declined sharply QoQ to INR9b (-26.5% QoQ, +12.4% YoY) - well below our estimate of INR10.4b. This was due to significantly lower other income and forex gains.
• Worst for Telecom behind: Telecom saw a steep decline (-6.4% QoQ), but excluding cross currencies and Comviva, the decline was 1-1.5%. Management, however, cited that growth is coming back in the vertical. The robust deal flow is reflected in LOIs worth ~USD200m in the first 30 days of the month (equivalent to run-rates seen for the entire quarter recently).
• Traction in Enterprise multi-faceted: Although growth across verticals was a mixed bag in Enterprise, the segment grew 3.8% QoQ CC. Manufacturing continued its healthy form spread across sub-segments. Even BFSI, though volatile sequentially, is expected to deliver on YoY revenues. The 'Others' vertical has been the fastest growing segment, thanks to CjS acquisition.