Prabhudas Lilladher has given Buy recommendation for Tech Mahindra with a target price of Rs. 1945 in its research report issued on Jan 18, 2022

Prabhudas Lilladher’s research report on Tech Mahindra

TechM announced acquisition of 100% stake in CTC, digital engineering and transformation provider serving Insurance industry for EUR 310 mn (~USD 353.7 mn) including EUR 100mn earnouts payable over 4 years. CTC generated revenue of EUR 71.3 mn (~81.36 USD mn) in CY20 which amounts to 2% of TechM’s FY21 revenue. In 9MCY21 it reported revenue of EUR 69 mn(~USD78.7mn) – (quarterly run-rate of USD 26 mn vs USD 20 mn in CY20). About 60% of its revenue are from an anchor client. CTC’s valuation of 4.3x EV/Sales is at upper end of similar transactions in this space. It is TechM’s largest and among its most expensive acquisitions, compelling the company to drive cross-selling deals for scaling up in insurance space. CTC acquisition will enable TechM – 1) to scale up in Insurance sector given CTC’s deep digital transformation expertise in the sector, 2) to expand Eastern European near shore delivery centre as CTC has over 720+ highly-skilled IT professionals located in Latvia (85%) and Belarus (15%), regions having highly skilled pool of tech talent and 3) provide TechM with tech talent having differentiated capabilities in end-to-end digital engineering which can be scaled up across different industries.

Outlook

Our EPS estimates increase by 1.6% for FY23& FY24 led by revenue increase in revenue growth estimates for FY23 & FY24. We arrive at DCF based target price of Rs.1945, earlier Rs. 1908 (implying target multiple of 23x on FY24 EPS). TechM is currently trading at 22.2/20.4x earnings multiple on FY23/24 EPS of INR 77/84.4 on FY23/24E respectively, inexpensive. TechM has Revenue/EPS CAGR of 13.8%/13.5% over FY22-24. Maintain Buy.

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