Buy Tech Mahindra; target of Rs 1240: Emkay Global Financial

Emkay Global Financial's report on Tech Mahindra

Tech Mahindra’s Q1FY23 revenue was broadly in line with our expectations, but EBITM missed our estimates. Revenue grew by 1.5% QoQ to USD1,632mn (3.5% CC), led by CME (3.9%) and Enterprise (3.2%). EBITM declined 220bps QoQ to 11%. Net new deal wins were robust with a TCV of USD802mn in Q1. The deal pipeline remains healthy across the CME and Enterprise segments, and the company expects steady deal closures and revenue conversion to continue. Management remains confident of sustaining revenue growth momentum on the back of broad-based demand, healthy deal intake and strong deal pipeline. It believes EBITM has bottomed out in Q1 and expects 100-150bps sequential margin improvement in every quarter for the next three quarters, leading to an exit quarter margin of ~14%.

Outlook

We cut our FY23/FY24/FY25 EPS estimates by 3.3%/1.8%/0.3%, factoring in the Q1 performance. Sustained revenue growth momentum, management guidance on margin recovery and 4%+ dividend yield make the risk-reward favorable, in our view. We maintain Buy with a TP of Rs1,240 (Rs1,260 earlier) at 17x Jun’24E EPS.