HDFC Securities is bullish on Tech Mahindra has recommended buy rating on the stock with a target price of Rs 720 in its research report dated July 29, 2020.
HDFC Securities' research report on Tech Mahindra
Tech Mahindra posted better-than-expected revenue and margin along with strong free cash generation. Revenue was down 6.3% QoQ CC vs. TCS/INFY/WIPRO/HCLT performance of -6.9/-2.0/-7.5/-7.2% QoQ CC respectively. Telecom was down 8.2% QoQ CC (in line with our estimate) but Enterprise (-5.1% QoQ CC) performed better than expected. Growth was led by Technology & Media (+13.1% QoQ), while all other verticals were under pressure. BPS was down 12.6% QoQ due to both demand and supply-side factors, and recovery is expected from 2H. Net new TCV wins were down 39% YoY to USD 290mn, but the pipeline remains strong. TechM will be a beneficiary of vendor consolidation in the Telecom segment because of its leadership position. The 5G related spend has shifted to early FY22, but TechM is well-poised to benefit from this spend. Margin performance was better than expected (10.1% vs. the estimate of 8.7%), led by lower travel cost, offshoring, and lower SG&A offset by higher sub-con cost.
Outlook
The margin recovery will be gradual, and 4Q exit will be similar to the 1QFY20 level. We increase the EPS estimate by 7.7/5.0% for FY21/22E to factor in better growth and margin. Our target price stands at Rs 720, based on 14x (in line with 5Y average) June-22E EPS. Maintain BUY.
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