Buy Tech Mahindra; target of Rs 1220: Sharekhan

Sharekhan's research report on Tech Mahindra

For Q3FY23, Tech Mahindra reported revenues at $1668 million up 1.8% q-o-q/8.8% y-o-y. However, revenue growth in CC terms stood at 0.2% q-o-q, missed our cc growth estimates of 0.7% q-o-q. EBIT margin at 12% for Q3FY23 was up by ~60 bps q-o-q owing to currency tailwinds, lower employee benefit expenses and lower subcontracting costs which was partially offset by higher SG&A expenses. Deal wins picked up with net new deal TCVs at $795 million versus $716 million in Q2FY23. The company’s utilisation rate improved by 100 bps sequentially to 85% while LTM attrition moderated by 300 bps to 17% in Q3FY23 from 20% in Q2FY2023. The management said that, while demand drivers are strong, they are anticipating a slowdown in H1CY23. The company cited that they are witnessing decision making being more spread out. However, they expect a lot more cost take out opportunities fructifying and while they are optimistic on retail and manufacturing, they are seeing tepidness in the Hi-tech vertical.

Outlook

We expect the outlook for FY24 to be uncertain on account of global headwinds and any recovery is most likely to be gradual. While the company has reflected some concerns of delays in decision making, the consistent deal wins and healthy deal pipeline provides decent revenue visibility. Hence, we maintain a Buy rating on Tech Mahindra with unchanged PT of Rs 1220. We advise investors to adopt a staggered approach to invest from long term perspective.

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