Buy Tech Mahindra; target of Rs 850: HDFC Securities
HDFC Securities is bullish on Tech Mahindra has recommended buy rating on the stock with a target price of Rs 850 in its research report dated November 06, 2019.
November 07, 2019 / 03:59 PM IST
HDFC Securities' research report on Tech Mahindra
Revenue stood at USD 1,287mn (+3.2% QoQ, +4.1% CC), which was above our est. of USD 1,261mn.Growth was led by 5.6/2.0% QoQ CC growth in Enterprise and Telecom. Enterprise (59% of rev) was up 4.8% QoQ (highest in last eight qtrs) due to strong recovery in Hi-Tech (+10% QoQ), Retail (+14.7%) and Healthcare (+11.0%). Manufacturing (-4.2%, auto exposure) remains weak but will recover in 2H. Healthy Enterprise TCV of USD 490mn (highest ever) bolster confidence. Telecom growth was slightly lower than expectation but deal win and healthy pipeline provides growth visibility. Telecom registered the largest deal win (AT&T), TCV of USD 1bn, which will start contributing in 2HFY20. 5G also remains a potential growth driver. Digital (39% of rev, +39.7% YoY) remains the key strength while legacy was down 8.6% YoY in 2QFY20. The acquisition of Born group (Design agency) will further enhance capabilities. It has revenue of USD 50mn (+28% YoY) with 1,100 employees. The deal was valued at 1.7x and has rev/emp of USD 50K. EBIT margin improved 131bps QoQ to 12.8% (vs est. of 12.3%) led by efficiencies, lower SG&A (+100bps) and higher utilisation offset by wage hike (-40bps). 2H margin will remain subdued due to transition cost. Margin trajectory will improve in FY21E. High attrition of 21%, one of highest in the industry, is a concern.
We upgrade Tech Mahindra to BUY from NEU based on strong show in 2QFY20. Growth engine has revived with large deal win in Telecom and strong Enterprise TCV. We increase earnings est. for FY21/22E by 3.9/4.3% based on better visibility and margin recov ery. We increase our P/E multiple to 15x vs. 12x earlier. Our TP now stands at Rs 850 based on 15x Sep-21E earnings.
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