Tech Mahindra (TechM) reported robust set of Q2FY22 numbers. The company’s revenue growth of 7.2% QoQ in CC terms was led by growth across communication and enterprise.
"The results were above expectation. The company continues to see strong net new deal wins (greater than USD 5 million) at USD 750 million with communication at USD 255 million and Enterprise at USD 495 million. TechM expects deal momentum to continue in coming quarters. This coupled with robust outlook in healthcare, BFSI, Hi tech and communication coupled with hiring of 14930 & doubling of fresher represents healthy revenue visibility. Hence, we upgrade the stock from 'HOLD' to 'BUY' with a target price of Rs 1,770 (PE of 22x on FY23 EPS)."
Key highlights and investment rationale
Broad based performance in Q2FY22
Q2FY22 revenue grew 6.4%/+16.4% QoQ/YoY in USD driven by enterprise segment (60% of revenue) has grown by 7%/15.9% QoQ/YoY in CC terms. Communications, Media and Entertainment (40% of revenue) has grown by 6.7%/16.1% QoQ/YoY.
Communication & enterprise to drive long-term double-digit growth
The company has maintained its guidance of double- digit revenue growth and 15% margins for FY22. The growth in revenues expectation is based on healthy H1 (15.5% YoY growth) and seasonally strong H2 growth. Hence, we have built in a growth of 16.6% for FY22. Further, in the next two years we expect the company to register double digit growth led by higher traction in communication, BFSI, HI Tech and healthcare. We expect legacy modernisation, 5G, automation, network and cloud to drive communication revenues. This coupled with traction in enterprise segment (led by cloud, customer experience & data) will enable TechM to drive double digit organic growth in the long run.
EBIT margins on improving trend
Going forward, we expect margins to improve led by rationalising G&A (due to centralisation of back offices in portfolio companies), revenue growth, and higher offshoring. Hence, we expect margins to improve 210 bps to 16.3% over FY21-23.
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