Tech Mahindra: Focus on margin expansion in near term

6 Mar 2023 , 10:04 AM

Recommendation: Add

Target Price: Rs 1,070

 

Tech Mahindra’s focus on large deal wins has led to the quarterly large deal TCV increasing by 1.8x versus pre-COVID levels. In the near term, growth could be impacted by the uncertain macro, but in the medium term digital transformation continues to be a key priority for enterprises, per the management. FY23 Ebit margins have been impacted by investments in building capabilities, large deal transitions and tight supply side. Management is focused on margin expansion in the near term and sees multiple levers to improve margins over the next two to three years. Analysts at IIFL Capital Services forecast TECHM to deliver USD revenue/EPS Cagr of 8%/14% over FY23-25. 

Focus on alliances, large deals and Platforms to drive growth

TECHM’s recent growth has been driven by successful client mining through large deal wins. Going forward, management is focused on increasing its revenues from partnerships with hyperscalers (currently ~30% of revenues are from partnerships versus peers at ~40%) and driving non-linear growth through cross-selling its Platforms (2x growth in next three years), along with continued focus on large deal wins. TECHM expects 5G-related revenues to touch USD1 billion in FY23.

Margin recovery in top near-term priority

TECHM’s Ebit margins have contracted by ~300bps in 9MFY23 versus FY22, due to investments in building capabilities (both organic and inorganic), step-up in large deal wins and tight supply side. In the near term, management is focused on levers like sub-contractor rationalization, increasing offshoring, org simplification and divestment of low-margin business — so as to increase margins. The company is confident of taking margins sustainably, without giving a target range or timeline for the same.

Disciplined capital allocation to continue

Over the last 12 months, TECHM has focused on integrating previously acquired entities and returning excess cash to shareholders, which is likely to continue. Management believes succession of the new CEO (due in December) is likely to be smooth, with an overlap with the current CEO.