Neutral Tech Mahindra; target of Rs 1360: Motilal Oswal

Motilal Oswal's research report on Tech Mahindra

Tech Mahindra (TECHM) reported 3QFY24 revenue of USD1.57b, up 1.1% QoQ in CC terms. Adjusting for a one-time product-related revenue gain of 140bp, 3Q growth came 80bp ahead of our expectation. CME remains a weak area, declining marginally despite a low base. Enterprise growth was mixed, with Manufacturing and Retail doing well, while BFSI and Technology declined. TECHM had another quarter of low profitability, with 7.0% adj. EBIT margin (excluding restructuring and other one-time costs), down 30bp QoQ/500bp YoY and slightly below our estimates. Reported EBIT margin stood at 5.4%, up 70bp QoQ. 3Q TCV came in at USD381m (-40% QoQ/-52% YoY), pulling down its trailing 12m TCV/book to bill to its lowest in the last 3/5 years. We remain positive about the restructuring initiatives at TECHM under the new leadership. The recent steps, including right-sizing SBUs, investing in key accounts, establishing vertical delivery teams, and prioritizing employee investments, as moves in the right direction. However, we expect to see the positive impact of these actions only gradually, which can result in near-term misalignment with investor expectations, particularly in terms of profitability. With the management committing to incremental clarity post 4Q earnings, April remains the key to any view change.

Outlook

We remain on the sidelines as we feel the current valuation fairly factors in the uncertainties around growth and margin. Our FY25/FY26 EPS estimates remain broadly unchanged post 3Q results. We remain Neutral on the stock with a TP of INR1,360, as we roll forward to 20x FY26E EPS.