Gladiator Stocks - Tech Mahindra: ICICI Direct

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ICICI Direct's research report on Tech Mahindra

Strategy

Buy Tech Mahindra in the range of Rs 830.00–850.00 for target price of Rs 950.00 with a stop loss of Rs 780.00. Time Frame: Six months.

Technical View

The IT sector remain in secular up trend since bottoming out in March 2020. As the major IT companies as trading at their all-time highs and are forming higher peak and higher trough in all time frame. The share price of Tech Mahindra is currently placed at the previous multiple high since February 2019 around Rs 840-850 levels. We expect the stock to resolve above the same and extend the current up move. Our expectation of resolving above the major hurdle of Rs 840-850 is based on the following key observations:
a) the entire consolidation of the last eight months has taken the shape of a bullish rounding formation signalling a reversal of the corrective trend and resumption of fresh up move.
b) it has witnessed a faster retracement as it has completely retraced its previous four quarter decline (Rs 846-471) in just two quarters.
c) the last quarter up move is backed by strong volume of highest since CY 2009 highlighting larger participation.
Hence, we expect the stock to continue with its positive momentum and head towards Rs 950 levels in the coming months as it is the 123.6% external retracement of the entire CY’20 decline (Rs 846-471).

Fundamental View

Tech Mahindra is an IT service company catering to various segments like communication (~40%), manufacturing (~17%), technology, media & entertainment (~9%), Banking Financial, Services & insurance (~16%), retail transport & logistics (~7.3%) and others (11.2%). Geographically, the company generates ~49% revenues from Americas, 26% from Europe and 25% from rest of the world. The company is aiming to improve revenues and reaching industry leading growth by focusing on cross sell opportunities. The company is also increasing its. resource allocation to high growth geographies and reducing its focus on emerging & low growth geographies. Apart from improving revenues, the company is also rationalising cost to improve margins. The company aims to improve margins by improving margins of portfolio companies, lowering of discretionary spend, lower facility cost, lower travel cost, increased automation in some of the service lines, higher offshoring and benefits of large deal won in previous quarter. We believe ramp up of large deal won in previous quarters and improvement in deal wins in coming quarters will drive revenues. Further, in the long term, we believe its leadership in communication vertical will make it a key beneficiary of vendor consolidation in the segment. It would also benefit from 5G opportunities. Enterprise segment will also benefit from improved digital traction, success in large deals. Hence, we remain positive on the stock.

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Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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