Tech Mahindra Ltd. share price target

Waiting in the Wings: Tech Mahindra (TechM) went through rough times due to restructuring at one of its subsidiaries LCC and prolonged weakness in its telecom business (which contributes 41% of revenues) due to delay in spending decision as a result of consolidation in the industry.

Tech Mahindra (TECHM) subsidiary Pininfarina (PINF) was a harbinger of growth for the company over the past two years, bringing in 16% of incremental FY19 revenue.

Tech Mahindra Ltd (TechM). reported subdued growth in all the terms Q1 FY20, TechM's consolidated revenue declined by 1.6% QoQ and grew marginally by 2% on YoY basis in constant currency terms. EBITDA Margins have declined by 300 bps on QoQ basis and stood at 15.2%.

While TECHM's Q1FY20 revenue was in-line with our forecast EBIT margin was a miss. Q1 revenue declined by 1% QoQ in CC. EBIT margin saw a sharp decline of 390bps QoQ to 11.5% vs. our forecast of a 235bps QoQ decline. Higher other income and FX gain aided EPS, which was in-line to our forecast at Rs11, -13.6%/+8.6% QoQ YoY. In Q1, TECHM has maintained the deal-win momentum and has secured deals with TCV of US$475 mn. Further, its deal-pipeline is at an all-time high. While it is confident of achieving high single-digit YoY growth in Communications vertical and mid single-digit in the Enterprise segment, it expects headwinds to its EBIT margin....

Large deal wins to offset pressure in legacy business Despite winning large deals over the past few quarters, the company is unable to register healthy growth mainly due to pressure on the traditional business, auto in manufacturing, softness in BFSI and project volatility in healthcare. However, going forward, the large deal wins in communication, healthy pipeline in BFSI and healthcare are expected to help improve growth in coming quarters. The company has won US$475 million deals across communication and enterprise segment in Q1FY20. This, coupled with...

Tech Mahindra (TECHM) posted a disappointing Q1FY20 as (1) revenue contracted in all verticals except others', (2) top 5/10/20 client performance flagged, (3) EBIT margins shrank 390bps QoQ, (4) attrition failed to cool off, (5) DSO rose due to high unbilled revenues, and (6) cash generation slumped.

Tech M disappointed with de-growth in revenues (-1% QoQ CC, -1.6% QoQ Change in Estimates | Target | Reco USD) (Ple: 0.7% QoQ CC, 1% QoQ USD) & margin fall of 391 bps QoQ to 11.5%(Ple: 12.8%). Weakness was across verticals, telecom declining by 3.2%...

Profit below est. due to plummeting margins: 1QFY20 revenue grew 3.7% YoY CC (v/s est. of +3.8% YoY), EBIT declined 8% YoY (v/s est. of +10.5% YoY) and PAT increased 7% YoY (v/s est. of +17.9% YoY). EBIT margin declined 390bp QoQ to 11.4% (220bp miss to our est. of 13.6%). Margins were primarily impacted by a sharp decline in GPM, down 430bp QoQ to 28.8% (260bp below our est.). PAT at INR9.6b, was down 15% QoQ (9% miss to our est.), mainly due to operational miss; it was partially offset by higher other income at INR3.4b (v/s est. of INR2.6b)....

Key takeaways from interaction with TECHM's manufacturing head Tech spending on rise: Changing portfolio, cloud adoption, etc. are impacting CIO functions and translating into reduction in CIO budget led by contraction of spending on legacy IT systems. However, the overall enterprise Tech spending has increased to ~6.5% of overall revenues V/s ~4.5% earlier backed by increase in tech penetration in areas like 1) products and product embedded software 2) Factories and 3) CMO budgets customer experience, digital dealerships, etc. Productized and platform-based solutions in demand: As enterprises...