MOSL: TECH MAHINDRA (Neutral): Improving outlook, but operational metrics stretched
TECH MAHINDRA: Improving outlook, but operational metrics stretched
(TECHM IN, Mkt Cap USD14.7b, CMP INR1128, TP INR1220, 8% Upside, Neutral)
Further re-rating to require consistency in growth
- In USD terms, revenue growth of 3.9% QoQ CC in 1QFY22 was above our estimate mainly on account of Communications (+2.9% v/s expectation of flat growth). The Enterprise business reported a growth of 4.7% QoQ CC. New deal wins fell 20% QoQ to USD815m (0.6x BTB), but stayed ahead of past trends, while the qualified pipeline remained at historical peaks.
- EBIT margin dipped by 130bp QoQ in 1QFY22 (led by wage hike, visa cost and seasonality in Communications), but was 90bp above our estimate. TECHM added 5,200 employees in 1QFY22 (70% in the BPS vertical), although software professionals remained below 1QFY21 levels. Despite this, utilization rose by 100bp to one of the highest levels in our IT coverage (89% excluding trainees).
- TECHM marginally revised up its FY22E revenue growth guidance as it now expects the Communications vertical to grow at double-digits in FY22 (v/s higher single-digits earlier). With healthy deal bookings and highest ever pipeline, we expect TECHM to deliver revenue growth of 13% in FY22, although it will still be the weakest among our largecap coverage universe.
- We expect TECHM to deliver stable to improving margin performance over the next three quarters, although higher attrition (17.2% LTM, +390bp QoQ) and utilization remain a key risk on the downside for margin. We expect a margin expansion of 120bp from FY21-23E, resulting in 18% PAT CAGR over FY21-23E.
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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