Tech Mahindra Ltd Performance: Steady Revenue Performance; EBITM Misses Expectations

BUY

CMP: Rs1017  

Target Price: Rs1240

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* Tech Mahindra's Q1FY23 revenue was broadly in line with our expectations, but EBITM missed our estimates. Revenue grew by 1.5% QoQ to USD1,632mn (3.5% CC), led by CME (3.9%) and Enterprise (3.2%). EBITM declined 220bps QoQ to 11%.

* Net new deal wins were robust with a TCV of USD802mn in Q1. The deal pipeline remains healthy across the CME and Enterprise segments, and the company expects steady deal closures and revenue conversion to continue.

* Management remains confident of sustaining revenue growth momentum on the back of broad-based demand, healthy deal intake and strong deal pipeline. It believes EBITM has bottomed out in Q1 and expects 100-150bps sequential margin improvement in every quarter for the next three quarters, leading to an exit quarter margin of ~14%.

* We cut our FY23/FY24/FY25 EPS estimates by 3.3%/1.8%/0.3%, factoring in the Q1 performance. Sustained revenue growth momentum, management guidance on margin recovery and 4%+ dividend yield make the risk-reward favorable, in our view. We maintain Buy with a TP of Rs1,240 (Rs1,260 earlier) at 17x Jun'24E EPS.