Tech Mahindra Ltd: Disappointing Margin Performance; Deal Intake Remains Healthy

BUY

CMP: Rs1203  

Target Price: Rs1600

*  Tech Mahindra's Q4FY22 revenue came in line with our expectations, but EBITM missed our estimates. Revenue grew 4.9% QoQ to USD1,608mn (5.4% CC), led by Enterprise (5.8%) and CME (4.8%). EBITM declined 160bps QoQ to 13.2%.

* Net new deal wins were robust with a TCV of USD1,011mn, split across CME (USD645mn) and Enterprise (USD366mn). FY22 deal intake grew ~48% YoY to USD3.3bn. The deal pipeline remains healthy, and it expects healthy deal win momentum to continue.

* Management remains confident of sustaining revenue growth momentum on the back of broad-based demand, solid traction in the CME biz (uptick in digital transformation demand led by 5G spends), healthy deal intake and deal pipeline, and robust demand for digital engineering, cloud, data analytics and cyber security services.

* We cut our FY23/FY24 EPS estimates by 7.5%/6.8%, factoring in the Q4 performance, recent acquisitions, and lower margin assumptions. Strong revenue growth momentum and a ~4% dividend yield will support valuations, although the stock lacks near-term triggers after a big miss on margins. We maintain Buy with a TP of Rs1,600 (Rs1,730 earlier) at 22x Mar'24E EPS.