Analysts who see no upside in the stock believe operating challenges may offset gains from a strong business environment going ahead. Others want to believe the stock is set for a period of outperformance.
Phillip Capital said double-digit revenue growth in FY22, as guided, will be a first for TechM after half a decade – a testimony of its significant underperformance. It said the management commentary keeps revolving around 5G where the pipeline continues to be strong, but the brokerage is concerned about operational challenges at the IT major.
Despite wage hikes, the attrition rate for Tech Mahindra jumped to 17 per cent in the June quarter from 13 per cent in the previous quarter, reflecting the struggle in retaining talent.
“While the company reported strong employee addition in the quarter, five of last seven quarters have seen a net reduction. Besides, almost 70 per cent of the additions are in the BPO segment. TechM is precariously managing margins by measures like peak utilisation, lower bench strength, headcount management, and deferred wage hikes – which are not sustainable,” Phillip Capital said while suggesting a target of Rs 1,180.
This target was breached on Friday only when the stock surged 9.7 per cent to hit a high of Rs 1,237 on BSE.
Despite healthy deal bookings and the highest ever pipeline, Motilal Oswal expects TechM to deliver revenue growth of 13 per cent in FY22, still the weakest in the largecap IT pack.
“We continue to stay on the sidelines on TechM as we see its stronger business performance being offset by elevated operational metrics in a supply-constrained environment. Our target implies 17 times FY23 EPS,” the brokerage said while suggesting a Rs 1,220 target on the stock.
Tech Mahindra reported a 39 per cent YoY rise in net profit at Rs 1,353 crore for the June quarter on a 12 per cent YoY rise in sales at Rs 10,198 crore. In dollar terms, the company’s revenues rose 4.1 per cent sequentially, while in constant currency terms it climbed 3.9 per cent. Deal wins for the quarter came in at $815 million compared with $1,043 million in March quarter and $290 million in the year-ago quarter.
“There has been some uptick in revenue growth momentum led by deal wins. The growth in CME (communication, media and entertainment) segment continues to be modest. The 5G-related deal activity has started pickup up, though it is still far from being a meaningful contributor. The uptick in attrition and travel expenses coming back by the end of the year are potential margin headwinds,” YES Securities said while suggesting a target of Rs 1,275. The CME segment accounts for 40 per cent of its revenues.
During the quarter, operating margins contracted 160 basis points sequentially to 18.4 per cent.
The IT major has reiterated its EBIT margin guidance of 15 per cent for FY22 with a focus on driving greater synergies in the portfolio of subsidiary companies, enhanced offshoring/right shoring and usage of automation.
Nirmal Bang said that the market may be a tad disappointed that commentary on margin has not been stronger given that the start has been better than expected. The brokerage has, however, raised its revenue and margin estimates modestly for FY22-FY24.
The brokerage finds the stock worthy of Rs 1,453 at 19.9 times FY23 EPS, which it said is still at a 35 per cent discount to industry benchmark TCS’ target PE multiple.
“Over the last 5 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-peer-set margins and lower RoIC. TechM has struggled in the past 5 years in balancing growth and margins, but we believe that it is getting its act together now,” Nirmal Bang said while expecting the stock to outperform over the next 6-12 months.
Edelweiss said TechM, with strong leadership, client relationships, and huge transformation demand, will be in a position to post robust growth. It has revised the stock’s target to Rs 1,620.
