Dolat Capital recommended accumulate rating on Tech Mahindra with a target price of Rs 670 in its research report dated January 30, 2018.
Dolat Capital's research report on Tech Mahindra
USD rev. grew 2.5% QoQ to USD 1,209mn above our estimates helped by better performance of Manufacturing and Technology vertical. INR revenue improved 2.2% QoQ to ` 77.8bn (DCMe: ` 77.1 bn). EBIT margin improved 169bps QoQ to 12.7% (DCMe: 11.8%) led by improved utilization, better business mix and improved performance of its subsidiaries. PAT improved 12.8% QoQ to ` 9.4bn (DCMe: ` 8.7bn) helped by better margins and lower tax rate (22%) despite lower forex gain. Revenue from US/Europe improved 6.2%/1.9% QoQ, whereas, ROW underperformed with a decline of 3.3% QoQ in USD terms. Manufacturing/Tech/Retail grew 3.1%/13%/1.1% QoQ, respectively while Communication witness muted growth of 0.4% QoQ due to lower growth in VAS business. BFSI vertical declined 3.3% QoQ in USD terms. TechM sold Pakistan operation of LCC business for USD 1.4mn; which was included in miscellaneous income. LLC business has turned from loss making to single digit margin and company expects low single digit margin in LCC to be sustainable. Utilisation (83%) is almost at lifetime high levels, however mgmt. believes that this will sustain between 80-85%. TechM is estimated to report revenue USD revenue CAGR of 9% (FY18-20E) higher than most other large cap IT peers; this will primarily be driven by growth in key verticals (manufacturing, retail and BFSI) as telecom remains muted; however, within telecom, VAS is expected to report strong growth in Q4FY18 led by seasonality TechM has reported healthy EBIT margin improvement over the last two quarters (330 bps improvement); we expect margin to sustain in a narrow band of 11.5%-12.5% over the next two years, however, headwinds persist in the form of salary hike in H1FY19, investment in high skill hiring and limited levers for an improved utilization. Further, margin in the LCC segment, which have been a major driver for overall EBIT margin does not offer any scope of improvement from here on.
TechM has moved up by 25% over the last three months and is now trading at fair valuations of 14.7x/13.2x FY19E/FY20E. We believe healthy revenue growth coupled with minor improvement in margin on a YoY basis for FY19/FY20 may drive share price performance in the near term. We upgrade our estimates factoring better EBIT margin and upgrade TechM to an ACCUMULATE rating; rollover to a Mar’19 TP of ` 670 based on 14.5x one-year fwd. PER.
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