Tech Mahindra Rating – Buy: 5G Investments Quarterly Grow

Tech Mahindra (TechM) increased revenue by 4.9% qoq (5.4% in CC) to 1.61 billion, which is slightly higher than our $ 1.6 billion estimate and consistent with Street’s $ 1.61 billion estimate. EBITDA margin dropped to 80bp qoq 17.2%, lower than our and road estimates of 17.3% and 17.4% respectively. PAT stands at 15.1 billion rupees, more than we and the road estimate.

Demand is growing across the enterprise and CMEs, despite macro uncertainties. The benefits of investing in 5G are beginning to show. All in all, we are reducing the FY23E / FY24E EPS by 4.3% / 2.8%, but maintaining the TP at Rs 1,825 as the valuation moves forward in Q2FY24E

Strong demand in enterprise and CME
Revenue in CC increased by 5.4% qoq / 22.6% yoy Enterprise revenue was broad-based, with a 5.8% qoq increase in CC and a 4.8% qoq increase in communications, media and entertainment (CME) driven by 5G-related conversions. Among the enterprises, BFSI / Technology / Manufacturing / Retail, Transportation & Logistics / Others increased 18.4 / 15.1 / -1.3 / -6.5 / -1.6% qoq. According to geography, America grew 3.7% qoq, Europe 8.2% and RoW 3.8%. Some leadership changes in America have influenced strong growth.

Tough deal-wins drive further growth
TechM reported strong contract-win of $ 1.01 billion, with higher contributions from BFSI and CME Vertical. It aims to add $ 1 billion in revenue next year and more than $ 1 billion in deals each quarter. The EBITDA margin has shrunk to 17.2% due to headwinds such as low usage and wage effects due to supply pressures. The total headcount rose 6,106 qoq to 151,173. Larger hiring of freshers has reduced usage by 83% compared to 84% in the previous quarter. The rate of voluntary renunciation on an LTM basis was equal to 24%. On a quarterly annual basis, losses have decreased significantly and are expected to decrease further in the coming quarters.

Outlook and Evaluation: The Upcycle to Continue; Hold ‘Buy’
TechM is witnessing a strong demand environment with a high ratio of large contract-wins and the pipeline remains strong. Cloud revenue is growing at an accelerated pace. TechM is trading at 14.9x FY24E. We maintain ‘BUY / SN’ with a TP of Rs. 1,825 (25x Q2FY24E) at Q2FY24E.