Buy Tech Mahindra; target of Rs 546: Edelweiss

Edelweiss' research report on Tech Mahindra

We recently met management of Tech Mahindra (TECHM; Mr. Manoj Bhat, Deputy CFO, and Mr. Vikas Jadhav, Head, Investor Relations) to get an update on the company’s growth and margin strategy. Management reiterated that: 1) Telecom, including LCC, will grow at 2-5% and >7% ex LCC; 2) Non-telecom is set to grow by 8-10%; and 3) margin pressures would ease hereon, ex-currency impact. They emphasised their confidence in the measures initiated to control costs, streamline LCC business and swift recovery in margins along with revival of telecom capex. We believe TECHM will be a major beneficiary of revival in telecom spends. In our view, revenue/EPS CAGR of 9.4%/10.6% over FY17-19E along with undemanding valuation of 10.9x FY19E, implies favourable risk reward. Maintain ‘BUY’ with a target price of INR546.

Outlook

We believe our revenue/EPS CAGR of 9.4%/10.6% over FY17-19E is highly achievable and TECHM could spring a positive surprise. We believe management’s strong focus on margin improvement is a step in right direction and boost investors’ confidence to a large extent. At CMP, the stock quotes at undemanding valuation of 10.9x FY19E EPS. We reiterate ‘BUY/SP’ with a target price of INR546 (14x FY19E EPS), implying 28.6% upside.