Buy Tech Mahindra; target of Rs 1110: HDFC Securities

HDFC Securities' research report on Tech Mahindra

We maintain our BUY rating on Tech Mahindra based on better-than-expected growth and improving margin profile. USD revenue was up 2.8% QoQ CC vs. TCS/INFY/WIPRO/HCLT performance of +4.1/+5.3/+3.4/+3.5% QoQ CC respectively. Telecom growth bounced back to +4.4% QoQ (better than expected), led by rebound in Network Services and traction in BPM (+11.5% QoQ). Enterprise growth of 2.8% QoQ was supported by Retail and rebound in Manufacturing. Net-new TCV improved to USD 455mn (+8.1% QoQ), the pipeline remains robust and deal closures will improve. Spend on 5G (Networks & 5G Enterprise) is gradually increasing, and TechM, being the leader, is well-placed to benefit from this trend. Growth will be driven by both Telecom (Network services) and Enterprise (BFSI and Technology and Retail). Operational performance continues to improve, margin expansion of +173/373bps QoQ/YoY was better than expected, led by Offshoring, lower subcon and higher utilisation.

Outlook

We increase our EPS estimate by +4.2/2.9% for FY22/23E to factor in better growth and margin profile. Our target price stands at Rs 1,110, based on 17x Dec-22E EPS (5Y average 1Y fwd P/E of 14x). The stock currently trades at a P/E of 18.1/16.2x FY21/22E EPS.

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