Accumulate Tech Mahindra; target of Rs 520: Yes Securities

Tech Mahindra (TECHM) has reported a growth of 4% QoQ (+6.1% YoY) in US dollar denominated revenues. On a constant currency basis, growth came in at 5% QoQ. The growth was supported by acquisitions. On an organic basis, growth was 2.5% QoQ. Although decision cycles continue to remain elongated, the management is optimistic of a recovery in the communications vertical based on its deal pipeline and discussions with the clients. In addition to this, it also expects the enterprise segment to grow at a steady pace. While the opportunity in communications still continues to be huge; however elongated decision cycles in lieu of ongoing M&A in the sector for the communications business has been an overhang on the stock. Recovery in the communications segment, continued growth on the enterprise side as well as margin expansion on the back of multiple levers including favorable employee pyramid, increasing utilization, etc. make the long term story for TECHM attractive. Post the recent correction, the valuations too are attractive. We revise our view to ACCUMULATE with a TP of 520.

TechM has been able to retain its leadership in telecom which will help drive traction in communications business. In addition to this, it has made significant investments on the digital side should start yielding results in the form of a healthy traction for its enterprise vertical. Improvement in margins and improvement in performance of acquisitions will drive earnings growth in the long term. Delay in decision making on account of M&A in the communication sector had led to a subdued performance by the company for the past few quarters. However recovery in the same would help drive growth going forward. We revise our view to ACCUMULATE on the stock with a TP of INR 520.