Buy Tech Mahindra; target of Rs 940: HDFC Securities

HDFC Securities' research report on Tech Mahindra

We maintain our BUY rating on Tech Mahindra, based on better-thanexpected growth and improving margin profile. USD revenue was up 2.9% QoQ CC vs. TCS/INFY/WIPRO/HCLT performance of +4.8/+4.0/+2.0/+4.5% QoQ CC respectively. Telecom was up 3.2% QoQ (in line with our estimate), but Enterprise (+6.0% QoQ) performed better than expected. Growth was led by Technology & Media (+14.1% QoQ), BFSI and Retail bounced back strongly, while manufacturing was stable. BPM recovered strongly (+31.1% QoQ) due to market share gains and reversal in supply-side factors. Net-new TCV improved to USD 421mn, and the pipeline continues to remain strong. The 5G related spend has shifted to FY22E, but TechM is well-poised to benefit from this spend. Telecom recovery will be gradual (led by 5G), but Enterprise will drive growth, supported by a revival in Manufacturing and Retail verticals. Margin expansion of +413bps QoQ was better than expected (14.2% vs. the estimate of 11.3%), led by offshoring, higher utilisation, lower sub-con and visa fees.

Outlook

TechM aims to expand the margin to 15%, but it will still have the lowest margin in Tier-1 IT. We increase our EPS estimate by 7.1/8.1% for FY22/23E to factor in better growth and margin. Our target price stands at Rs 940, based on 16x (~15% premium to 5Y average) Sep-22E EPS. The stock currently trades at a P/E of 17.0/15.2x FY21/22E.

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