Tech Mahindra Shares Hit A Record On Q2 Growth, Analysts Bet On 5G Investments
Here's what brokerages made of Tech Mahindra's Q2 showing.
Shares of Tech Mahindra Ltd. jumped the most since July 30 to a record high after the IT major's revenue rose 7% sequentially to meet estimates.
Shares of Tech Mahindra surged as much as 6.9% to Rs 1,630 apiece, a record high.
Analysts see its increased hiring and 5G-led growth strategy as positives. Higher subcontracting costs and lower or deferred wage hikes, however, remain a concern.
The Pune-based company recorded a revenue of Rs 10,881.3 crore in the quarter ended September. That compares with the Rs 10,662.50 crore consensus estimate of analysts tracked by Bloomberg.
The digital services firm's Ebitda margin, however, remained flat, and it maintained its margin guidance of over 15% for FY22.
“Our strong execution has ensured that we maintain our profitability margins while accelerating growth momentum," Milind Kulkarni, chief financial officer at the firm, said.
The company announced the acquisition of Lodestone, a digital engineering quality assurance provider for new-age digital companies, alongside its results.
Of the 49 analysts tracking the company, 42 maintain 'buy', six suggest 'hold' and one recommends a 'sell'. The average of analyst price targets compiled by Bloomberg implies an upside of 2.9%.
Here's what brokerages made of Tech Mahindra's Q2 performance:
Phillip Capital
Maintains 'neutral' rating, raises price target to Rs 1,560 from Rs 1,340, implying a potential upside of 2%.
Tech Mahindra reported a strong set of numbers which was ahead of expectations.
Revenue growth of 7.2% was ahead of most large-cap peers, and its highest in over a decade.
Margins remained stable while deal flow remains strong.
The strongest part of the results, however, was the hiring. It added almost 15,000 employees in the quarter on net basis – more than last three years combined and its highest ever. The hiring alludes to the strong demand environment and perhaps, growth expectations.
Concerns of operational challenges with Tech Mahindra are now being addressed gradually. Strong hiring in IT services and decent bench strength are positive developments.
On the other hand, concerns like peak utilisation, higher subcontracting costs and lower/deferred wage hikes remain. Although the strong deal wins should provide momentum in the near term, the lack of visibility for medium-to-long-term growth keeps us unexcited about the Tech Mahindra story.
Amidst the massive rerating of the entire sector, its inexpensive valuations ensure limited downside from current levels.
Dolat Capital
Maintains 'accumulate' rating with a target price of Rs 1,710 apiece, implying a potential upside of 12%.
Tech Mahindra delivered a strong quarter fairly broad-based across verticals. The strategy of 5G-led growth (for enterprise, digital, network and also as a horizontal) continues to remain the key differentiator.
The operating margin performance was largely supported by induction of freshers and sustained offshoring (up 200 basis points year-on-year) which is helping mitigate upcoming headwinds from supply-side issues (attrition at 21% — up 380 basis points quarter-on-quarter).
Motilal Oswal
Maintains 'neutral' rating and target price of Rs 1,640 apiece, implying a potential upside of 8%.
Tech Mahindra's huge exposure to the communications vertical remains a potential opportunity as a broader 5G rollout can lead to a new spending cycle in this space. The company is seeing traction in 5G investments.
Expects a gradual improvement in Ebit margin, given the levers around productivity and cost optimisation. Elevated operating metrics and supply-side pressures remain a risk to margin estimates.
Prabhudas Lilladher
Maintains ‘buy’ rating, raises target price to Rs 1,862 from Rs 1,551 apiece, implying a potential upside of 22%.
Tech Mahindra has maintained consistency in execution and has improved in multiple areas — revenue momentum, stability in margins, total contract value, hiring and capital allocation.
Revenue growth gap narrowing with peers, improving margins and strong capital allocation will drive further re-rating.
On 5G theme, we believe Tech Mahindra to be the biggest beneficiary as its strong play in network infrastructure services differentiates it from other Indian IT companies. Its investments in 5G and strong long-term relationships with service providers are also yielding results.
Nirmal Bang
Maintains ‘buy’ rating and raises target price to Rs 1,756 apiece, implying a potential upside of 15%.
Management commentary on revenue momentum and deal flow indicates that FY22 will likely see Tech Mahindra record organic revenue growth around mid-teens, significantly ahead of expectations.
With good net new deal flow of $750 million (third quarter in a row) and indications that a similar number is likely in Q3, the exit out of FY22 will be a strong one and sets up Tech Mahindra to deliver closer to mid-teens growth even in FY23.
However, revenue acceleration in FY23 is unlikely on such a large base of FY22, unless Tech Mahindra wins bigger deals than it has in the recent past.
The strong revenue/profit compound annual growth rate over FY21-FY24 and reasonable valuation, which is almost at a 50% discount to peers like TCS/Infosys, is quite unwarranted due to the smoother execution that we see from the company. This could continue for some more time based on opportunities in 5G and on the enterprise side in digital.
Over the last five years, we have valued Tech Mahindra at a big discount to our benchmark, reflecting its structural weakness because of its less diversified revenue mix, higher client concentration, weak enterprise IT services business (where it was a late entrant), slower organic growth, lower-than-peers set margins and lower return on invested capital. It has struggled in the past five years in balancing growth and margins, but it is getting its act together.
Jefferies
Upgrades to ‘buy’ from ‘hold’, raises target price to Rs 1,950 from Rs 1,425, implying a potential upside of 28%.
Results beat Jefferies’ estimates across the board. Revenue growth of 7.2% helped it deliver steady margins and was the key highlight of Q2. Recent deal wins provide comfort on near-term growth.
Raises estimates by 2-12% to factor in an improving growth outlook in the communications vertical and the Q2 beat.
All top IT firms in India have posted a growth pickup in the communications vertical in Q2, boosting confidence in the IT spending outlook for the vertical.
Raises communications vertical revenue estimates by 2-6%.
Expect Tech Mahindra to grow its revenues by 15% in FY22, followed by 9.5% compound annual growth rate in FY22-24.
TechM's performance in the enterprise vertical was also strong with hi-tech and retail delivering strong growth.