Neutral Tech Mahindra; target of Rs 1250: Motilal Oswal

Motilal Oswal's research report on Tech Mahindra

USD revenue growth at 5.4% QoQ CC (organic growth at 2.7% QoQ CC) in 4QFY22 was in line and driven by growth in Communications/Enterprise at 4.8%/5.8% CC. TCV of USD1b in 4QFY22 was driven by a large 5G deal in Communications. EBIT margin dipped 170bp QoQ to 14.8% in 4Q (100bp excluding a one-off gain in 3QFY22), 80bp bellow our estimate, on account of a lower gross margin (80bp) and higher D&A expense (80bp). This was partially compensated by lower than expected SG&A costs (12.1%, a multi-year low). We see TECHM’s weak margin performance in 4QFY22 as concerning as it has already missed its lowered expectations, despite aggressively pulling back on SG&A spends. While the management expects profitability to improve in coming quarters, due to better pricing, we expect the impact of seasonality in the first quarter and wage hikes in the second and third quarter to limit scope for an improvement.

Outlook

We continue to stay on the sidelines on TECHM as we feel the current valuations fairly factor in better business dynamics against moderating profitability. We marginally tweak our estimates to account for lower margin. Our TP implies 15x FY24E EPS. We remain Neutral on the stock.