Prabhudas Lilladher recommended accumulate rating on Tech Mahindra with a target price of Rs 716 in its research report dated July 28, 2020.
Prabhudas Lilladher's research report on Tech Mahindra
Tech M positively surprised with decent set of numbers with revenues & margins above our & street estimates. TM posted with -6.3% revenue (Ple: -6.6%, Cons: -8.3%) CC decline with core business (telecom) declined by -8.2% QoQ & Enterprise revenue declined by -5.1% QoQ. Tech M surprised on margin front beating our/cons estimates by 100bps to 10.1% & management also mentioned EBIT margins will improve from hereon. PAT came at INR9.72bn which is 22% higher than our estimates/cons led by margin beat & higher other income. TCV was weak on expected lines (USD290mn in 1QFY21 vs USD475mn in Q1FY20) management cited weak macro environment impacted wins but guided improvement from Q2FY21 onwards. Tech M cited that 5G related demand will be pushed over to next year owing to ongoing trade war & geo political issues. Management mentioned worst is behind & expect improvement from hereon from revenue, margin front & TCV. This will provide tailwind to valuations. Management mentioned 1/4th of rev decline is due to supply side challenges & rest due to demand side challenges. We expect Enterprise business to led growth in FY21E led by Hi-tech, healthcare, life sciences & BFSI. We now expect 5% total revenue decline $ terms in FY21E (earlier: -9.7%) & have increased our margin estimates. Margin upgrades led to EPS upgrades of 16%/11% for FY22/23E.
We now value Tech M on 14X multiple (margin volatility & lower margins than peers will restrict further re-rating of multiples) on Sep-22 EPS of Rs.51 to arrive at a changed target price of Rs. 716 (old TP: Rs.493) Tech M is currently trading at 13.2X/12.8X earnings multiple of Rs.50.3/51.9 FY22E/23E EPS respectively. Upgrade to Accumulate from Reduce. Delay in pickup of TCV remains risk to the rating.
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