Buy Tech Mahindra; target of Rs 1220: Sharekhan

Sharekhan's research report on Tech Mahindra

Tech Mahindra’s (TechM) Q1FY2023 revenue was ahead of estimates, but EBIT margin lagged our estimates; Q1 saw strong deal intake, healthy deal pipeline, and good client mining. However, top accounts growth and cash generation remained weak. TechM is well poised to deliver strong revenue growth in the medium term, given strong deal wins, healthy deal pipeline, rising spending on 5G by telecom operators, and higher demand for cloud, connectivity, engineering, and XDS practices. Though wage revision is expected to weigh on Q2FY2023 margin, it would be offset by pricing leverage, recovery in the mobility business, and absence of large deal transition expenses. Management expects 100-150 bps q-o-q margin expansion in each quarter in FY2023.

Outlook

We maintain our Buy recommendation on TechM with a revised PT of Rs. 1,220, given robust deal wins, rising 5G spends, and reasonable valuation. The stock trades at 14x its FY2024E EPS.