Tech Mahindra Ltd. share price target

Tech Mahindra Ltd. (Tech M) reported strong results in terms of top line and in terms of operating margins in Q2FY20. Tech M posted strong revenue growth of 4.4% on QoQ basis and 6.2% on YoY basis for the period of Q2FY20 at Rs.9, 070 crs.

Strong Q2 Performance: TechM reported a revenue growth of 4.1 percent in CC terms sequentially

Revival in Enterprise coupled with Telecom traction (large deal win and healthy pipeline) is supporting growth. Healthcare and Hi-Tech growth is likely to sustain, BFSI will recover gradually. Manufacturing will stabilise, pain related to Auto sector is behind. Highest TCV wins both Enterprise and Telecom is encouraging. We expect USD revenue CAGR of 8.6% over FY20-22E led by Telecom/Enterprise CAGR of 8.0/8.9%. TechM has recovered sharply in the last 3M (+19%) and trades at a P/E of 14.6x FY21E. We upgrade to BUY based on improving business traction coupled with margin expansion. The risks to our thesis include deterioration in US/Europe macros, global trade war, Brexit uncertainties and delay in 5G spend. We upgrade Tech Mahindra to BUY from NEU based on strong show in 2QFY20. Growth engine has revived with large deal win in Telecom and strong Enterprise TCV. We increase earnings est. for FY21/22E by 3.9/4.3% based on better visibility and margin recovery. We increase our P/E multiple to 15x vs. 12x earlier. Our TP now stands at Rs 850 based on 15x Sep-21E earnings.

Tech Mahindra reported better than expected Q2FY20 operating performance led by beat on both revenues and operating margins.

TECHM's Q2FY20 result was a big beat to our forecast especially on revenue growth and EPS front. Q2 revenue grew by 4.1% QoQ in CC vs. our forecast of 1.4%. EBIT margin improved by 130bps QoQ to 12.8%, in-line with our forecast. Further, lower tax rate aided EPS of Rs12.9, +17.1%/+7.3% QoQ/YoY which was a big beat to our forecast. In Q2, TECHM has secured deals with TCV of US$1.49bn which includes US$1.08 bn in communications and rest in the Enterprise segment. Further, TECHM confirmed that the deal pipeline remains strong. We factor the beat in Q2 and increase FY20/21E EPS by 6.5%/4.7%. We largely maintain our...

Revenue outperformance: For 2QFY20, TECHM's revenue grew 7.3% YoY CC (v/s estimate of +4.8% YoY), EBIT declined 12.4% YoY (estimate of -18.4% YoY) and PAT increased 5.6% YoY (estimate of -10.8% YoY). Higher deal wins in the Enterprise segment led to the revenue outperformance. EBIT margin expanded 130bp QoQ to 12.8%, a 60bp beat to our estimate of 12.2%. However, during the quarter, SGA had a one-time gain of ~INR720, adjusting for which the EBIT margin was largely in line with our estimate. PAT was INR11.2b, up 17.2% QoQ, a 18.5% beat to our estimate, mainly due to the...

In this quarter, the company won record new deal wins worth $1.49 billion, up 3.1x QoQ. Of this, the telecom (communication) segment comprised ~$1 billion while enterprise constituted the rest. In addition, the deal pipeline remains strong as per management. A healthy deal pipeline enhances the revenue visibility and execution of these deals would accelerate the growth rate. Further, bottoming out of dragging forces in enterprise segment (auto in manufacturing) would support growth. In addition, momentum in 5G related investments and revenue flow from AT&T; deal would led to growth...

TechM revenues grew 4.1%/7.3% CC qoq/yoy and were better than our expectations of 2.9% qoq CC growth. Growth was driven by the Enterprise business (up 5.6% qoq in CC terms; ~59% of sales), while Telecom revenues grew 2.0% qoq in CC. TechM retained its FY20 revenue growth outlook of in-line with industry growth' in the Telecom business (~41% of sales) and mid-single digit growth in the Enterprise segment (~59% of sales), suggesting nearly 6.0-7.0% CC yoy growth for the entire business. EBIT margins are expected to decline 150-250bps yoy in FY20....

Recently, Tech Mahindra has secured a multiyear contract from AT&T; communications. The expansion of the strategic collaboration focus on accelerating AT&T;'s IT network application, shared systems modernization and movement to the cloud. As per media sources, it is the largest deal with a consideration of ~$1 billion. Previous to this deal, company has bagged an outsourcing contract of $100 million from Vodafone in New Zealand (media sources). Company's management commentary also indicates a revival in large deals, as companies move towards bigger transformation...

6 September 2019 We are modeling in incremental annual revenue of USD150m from FY21, while total revenue recognition will be ~USD57m in FY20. We have increased our CC revenue growth estimate for FY20/21 from 5.5%/8.2% to 5.8%/9.9% on account of the large deal ramp-up from the mid of 3QFY20. The deal is expected to weigh marginally on profitability in the initial transition phase, which may include some personnel transfer from AT&T; to TECHM. We thus lower our EBIT margin estimate for FY20/21 by 20bp to 13.1/13.8%. Overall, we expect the deal to have a limited impact on EPS in FY20 and be accretive FY21 onward. Consequently, we maintain our EPS estimate for FY20 but increase it by 1% for FY21. After a sluggish start to the year, the earnings growth outlook has turned muted for FY20. In our view, revenue growth remains crucial for a recovery in margins. The announcement of AT&T; deal comes as a booster to that effect.