Tech Mahindra: Disappointing performance; unchanged outlook!

Organic revenue remained largely stagnant (QoQ), behind our / consensus estimates. Even the tepid growth was driven by unreliable geographies like RoW (+6.2% QoQ, US$), while key markets like US (-1.3% QoQ, US$) posted a decline. Unburdened by wage hikes (contrary to industry), also aided by further ~0.9% QoQ reduction in delivery headcount and lower D&A, TechM was able to report 60bps EBIT margin expansion. Net new deal wins (US$1,043mn) was strong driven by large deals like Telefonica. However, their translation into future growth is the key monitorable given the limited causality in the past. Adjusted for the inorganic growth contribution from the five acquisitions (+2.1%, I-Sec est.) announced over previous five months, FY22 growth outlook (double digit) is largely unchanged. EBIT margin guidance remained largely stable at 15%+. 1) Integration of acquired entities, 2) ramp up of large deals and 3) high utilisations (87%) may challenge this margin guidance unless significant operating leverage comes to rescue. As we adjust our exchange rate and revenue growth assumptions, FY22-23 estimates change by -1% to 3.5%. Maintain HOLD as we value the stock at 15x FY23E EPS.

• Disappointing revenue performance; beat on margins. Organic revenue growth (+0.2% QoQ, CC) was behind our / consensus estimates. Communications (+0.2% QoQ, CC) segment remained largely stagnant and enterprise growth (+1.1% QoQ, CC) too was tepid. Within enterprise, BFSI (+4.9% QoQ, USD) reported strong growth aided by Tenzing and Momenton acquisitions. Retail (-3.2% QoQ, USD) vertical witnessed a sharp revenue decline. The tepid overall growth was led by RoW (+6.2% QoQ, US$) even as core geographies like US (-1.3% QoQ) posted a revenue decline.

EBIT margin was 50 / 70bps ahead of our / consensus estimates. Unburdened by wage hikes, also aided by further ~0.9% QoQ reduction in delivery headcount and lower D&A, TechM was able to report 60bps EBIT margin expansion.

• Translation of deal wins into revenue growth is key; outlook is largely unchanged. While net new deal wins (US$1,043mn) is strong, their translation into revenue growth is the key monitorable given the limited causality in the past. Optically, the double digit revenue growth guidance looks like an upgrade (from earlier guidance of high single digit growth). However, it should be noted that TechM announced five acquisitions in the last five months (Tenzing, Momenton, Perigord, Digital Onus & Eventus) with an expected inorganic growth contribution of 2.1% for FY22.

EBIT margin guidance remained largely stable at 15%+. (1) Integration of acquired entities, (2) ramp up of large deals and (3) high utilisations (87%) may challenge this margin guidance unless significant operating leverage comes to rescue. As we adjust our exchange rate and revenue growth assumptions, FY22-23E estimates change by -1% to 3.5%. Given its continued revenue growth underperformance and margin volatility, we expect TechM to trade at a significant discount to other Tier-I stocks. Maintain our HOLD rating valuing the stock at 15x FY23E EPS.

ICICI Securities