Tech Mahindra - In-Line Performance; Delivery Execution Off To A Steady Start

Information Technology   

July 26, 2024

TARGET PRICE (Rs) : 1,650

ADD

Tech Mahindra (TechM) reported a broadly in-line operating performance. Revenue inched up 0.7% QoQ to US$1.56bn, largely meeting our estimates. Growth was fairly broad-based, with 5 of the 7 verticals seeing QoQ growth (decline in Communications due to Comviva seasonality). EBITM of 8.5% was also in line with our estimate, with headwinds from Comviva seasonality and higher visa costs offset by benefits accrued from Project Fortius. The management highlighted that its ‘speed at scale’ strategy is being well received by clients, and reiterated that FY25 should be better than FY24. The demand environment has remained fairly similar to last quarter’s, albeit seeing some improvement versus previous year. With the company’s delivery execution to achieve its ‘Vision 2027’ strategy off to a solid start, we hike up our target multiple to 22x (from 19x). We tweak FY25-27E EPS by -2% to +2%, factoring in the Q1 performance and higher ETR assumptions. We maintain ADD and raise our TP to Rs1,650/sh (from Rs1,425 earlier) at 22x Jun-26E EPS.

Results Summary

Revenue grew 0.7% QoQ (0.7% in CC) to US$1.56bn, broadly in line with our estimates. Revenue for IT Services and BPS verticals grew 0.6% and 1.3% QoQ on like-to-like basis. Five of the 7 verticals saw sequential growth, with Manufacturing (2.4% QoQ), Hi-Tech and Media (0.5%), BFSI (0.7%), Retail, Transportation and Logistics (5.2%), and Healthcare and Lifesciences (7.9%) seeing growth. Communications and Others declined 1.9% and 5.2% QoQ, respectively. Among geographies, Americas grew 3.9% QoQ, while Europe and ROW declined 2.6% and 2.7%, respectively. Adj. EBITM expanded by 110bps to 8.5%, broadly in line with our estimate of 8.3%. Net new deal wins remained steady at US$534mn. Total headcount grew 1.5% QoQ/-0.5% YoY to 147,620, with the inclusion of ~2,100 interns among BPO professionals resulting in QoQ growth. Attrition was stable at 10.1% (vs 10% in Q4FY24). What we liked: Steady operating performance and deal intake. What we did not like: Weak cash conversion (~64% OCF/ EBITDA).