KR Choksey has given Buy recommendation for Tech Mahindra with a target price of Rs. 1447 in its research report issued on May 16, 2022

KR Choksey’s research report on Tech Mahindra

Tech Mahindra Ltd (TECHM) Q4FY22 performance was marginally higher than with our estimate. Dollar Revenue was up 4.9% QoQ and in CC term grew by 5.4% QoQ to USD 1,608Mn (KRChoksey est. USD 1,604Mn). Rupee revenue grew by 5.2% QoQ to INR 1,21,163Mn (KRChoksey est. INR 1,20,635Mn), driven by growth in communication/enterprise at 4.8%/5.8% in constant currency term with ~2.5% contribution from M&A. TCV deal win grew by 43.6% QoQ to USD 1Bn in Q4, was driven by telecom (TCV of USD 645Mn after AT&T deal) and enterprise (TCV of USD 366Mn). Reported operating margin contracted by 159bps QoQ to 13.2% , due to impacted by lower utilization, higher salary & retention cost, and higher depreciation & amortization charge. Enterprise was led by inorganic contribution which showed up in BFSI (18.4%) and technology (15.1%) verticals. Reported Net profit grew by 10% QoQ to INR 15,056Mn with margin of 12.4%. Though management believes that there will be improvement in profitability due to better pricing but we expect that there is a limited scope for improvement due to seasonality and wage hike (July) impacts. Our target price of INR 1,459 is based on 18x Mar-24E EPS with EPS CAGR of 13.4% over FY22-24E.

Outlook

Tech Mahindra is currently trading at a valuation with a P/E multiple of 18.6x/15.6x on FY23E/FY24E earnings. We expect strong deal momentum across verticals, tailwind in 5G & digital product engineering and clients centric approach will aid growth over the medium to long term in future and hence we are assigning a P/E multiple of 19x to the FY24E estimated EPS of INR 76.2 to arrive at a target price of INR 1,447 (Earlier price of INR 1,770), with an upside of 21.6%. Accordingly, we maintain our rating to a “BUY” to the stock.

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