Buy Tech Mahindra; target of Rs 860: Motilal Oswal

Motilal Oswal's research report on Tech Mahindra

TECHM's revenue grew 4.2% YoY (our estimate: +2.7%) to USD1,261m, EBITDA increased 36% YoY (our estimate: +34%) to INR17.2b and PAT grew 28% YoY (our estimate of flat growth) to INR12.0b in 3QFY19. CC revenue grew 4.3% QoQ (+6.4% YoY; our estimate: +2.6% QoQ, +4.7% YoY) in the quarter. Gross margin shrank 100bp QoQ to 33%. However, EBITDA margin expanded 50bp QoQ to 19.3% (above our estimate of 18.9% by 40bp), driven by lower SGA (-150bp QoQ to 13.8%; our estimate: 15.3%). PAT increased 27.7% YoY to INR12.0b, higher than our estimate of INR9.38b (28% beat), led by lower forex losses (INR0.8b v/s our estimate of INR1.9b) and lower ETR (17.8% v/s our estimate of 25%).

Outlook

Our TP of INR860 (15% upside) discounts forward earnings by 14.5x, the average multiple over the last five years. Maintain Buy.

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