Tech Mahindra Share price: 5G opportunity, uptick in enterprise growth and margin expansion are the key pointers

Tech Mahindra Share price: Kotak Institutional Equity interacted with Alok Palsikar, Tech Mahindra’s head of engineering services in a freewheeling discussion, here are the key highlights. Tech Mahindra has strong expertise in automotive and aerospace verticals. Outlook for the business is healthy post Covid and led by adoption of new technologies across verticals. Tech Mahindra is taking steps to increase participation in the fast-growing digital engineering space. 5G opportunity, uptick in enterprise growth and margin expansion underpin positive view on Tech Mahindra. Kotak maintains buy rating on Tech Mahindra share with target price of Rs 1020.

Brief overview of Tech Mahindra’s engineering services business:

Tech Mahindra’s engineering services business contributes US $700 mn of revenues accounting for 13-14% of overall revenues. Automotive is the largest vertical followed by aerospace. The company has strong capabilities in both the verticals. In automotive, the company delivers end-to-end design (from conceptualization to drafting) capabilities besides body engineering, powertrain, infotainment systems, ADAS and safety systems to name a few.

In aerospace Tech Mahindra have marquee clients such as Airbus and works in areas of cabin engineering, aero structures, avionics and component design. The company is also strong in telecom with capabilities in device engineering, testing and next generation network. Tech Mahindra has a presence in other areas of manufacturing, rail transportation and medical devices. Service capabilities are comprehensive and include mechanical, embedded, chip design, digital and device engineering.

Well experienced delivery heads; specialist sales for aero and auto:

Engineering services is organized as a strategic business unit (SBU) within Tech Mahindra. The unit has 14-15k engineers with the majority having over five years of experience. Onsite accounts for 20- 25% of effort with the rest executed at offshore/nearshore locations. The company has onsite presence in Europe, North America, Latin America and China. Delivery is led by senior architects with 20-25 years of experience. The company augments senior delivery with hiring of industry veterans who bring in strong domain knowledge and experience. The sales process is managed through account managers of Tech Mahindra and supported by solutions experts of the engineering team. Learning and development is a focus area for Tech Mahindra. The company indicated that freshers in engineering services need longer periods of training compared to IT services due to complexity in domain and tools/equipment.

Healthy outlook for engineering services in the medium term:

Tech Mahindra indicated that growth in engineering services business was impacted over the past few years due to factors such as muted demand in automotive, slowdown of projects in aerospace and delay in 5G rollout. There are several growth opportunities in the next three years. For instance the shift towards electric vehicles, connected and autonomous cars provides new opportunities in automotive. Health and medical devices is another vertical with strong growth opportunities. The company noted that except aerospace most other verticals are recovering well in the aftermath of Covid impact.

Tech Mahindra is positioning itself to benefit from rapid growth in Digital Engineering:

Digital engineering spend of enterprises is projected to grow at 19% CAGR in 2019-2025E by Zinnov. Tech Mahindra indicated that digital technologies in engineering have resulted in fundamental shifts across design, testing, manufacturing and aftermarket that provide benefits on time, effort, resources and costs.