Neutral Tech Mahindra; target of Rs 1010: Motilal Oswal

Motilal Oswal's research report on Tech Mahindra

TECHM reported a revenue of USD1.63b in 2QFY23, up 2.9% QoQ in CC terms v/s our estimate of 2% QoQ. Reported growth was muted at 0.3% QoQ in 2QFY23, led by BPS (up 3.6% QoQ), while IT Services were flat QoQ. EBIT margin rose 40bp QoQ to 11.4% (in line), despite wage hikes. Revenue growth in 2QFY23 was impacted by 100bp (annual run-rate of USD60m) due to TECHM’s account pruning program to exit low margin and non-strategic accounts. The management indicated a total annualized impact of USD100-120m in FY23, implying another 100bp hit over 2H. Moreover, higher furloughs in 3QFY23 may further impact revenue. We expect TECHM to deliver a USD revenue growth of 9.7% in FY23 (including ~400bp from the inorganic route), which is among the weakest in our Coverage Universe. It should see continued pressure in FY24 as its focus on margin may be at the cost of growth. We continue to expect positive commentary on 5G spends to play out over the medium term on account of growth and monetization uncertainty on the telco side. TECHM should deliver a USD revenue CAGR of 9% over FY22-24.

Outlook

We remain on the sidelines on TECHM as we feel the current valuations fairly factor in uncertainties around growth and margin. We marginally tweak our estimates to account for lower margin. Our TP implies 15x FY24E EPS. We remain Neutral on the stock.