Sharekhan interacted with Tech Mahindra’s management to understand the demand environment across verticals, progress on restructuring activities, deal momentum, and margin outlook. Sharekhan assumes the company to report revenue growth of 2.3% on a sequential basis in Q4 FY21 despite continued softness in aero sub-segments (contributes around 20% of manufacturing revenue), led by anticipated recovery in BFSI and technology verticals and continued growth momentum in the communication vertical. Sharekhan maintains Buy on Tech Mahindra with a revised PT of Rs 1150. Tech Mahindra share price today is Rs 990, down Rs 6 or 0.6%. 

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Though restructuring activities in Pininfarina would have some negative impact on margins during the quarter, Sharekhan expects EBIT margin to contract by 10 bps qoq, given lower traveling expenses, higher offshoring, and reduction in subcontractor expenses, work-from-home (WFH) efficiencies, and cost-efficiency measures.

Tech Mahindra has recently won a large deal worth around $ 300 mn - $400 mn from Telefonica (in Germany) in the 5G space, which was spilled over to Q4FY2021 from Q3FY2021. Deal wins in the 5G space for the past two consecutive quarters indicate the beginning of 5G-centric spends by large global CSPs. Further, management stated that both 5G-related deal TCVs to total TCVs and 5G revenue contribution to total revenue have been improving over the past few quarters.

Though Tech Mahindra’s management has indicated that the small deal pipeline has started converting faster, the conversion rate of large deals has not reached preCOVID level yet. With the Telefonica deal, Sharekhan expects the company’s total deal TCVs to be 1.5x-2x higher compared to its average quarterly deal TCVs of $400 million-500 million.

Perigord’s acquisition would help Tech Mahindra:

(1)    to enhance its expertise in the global pharmaceutical, healthcare, and life science (HLS) sectors by providing services to large pharma clients across the globe
(2)    to extend capabilities in the consumer-packaged goods (CPG) vertical given Perigord’s platform capabilities in packaging solutions

Given strong deal wins in the communication space, healthy deal pipeline in the enterprise segment, and strong demand across digital stack, Sharekhan believes that the company would report strong revenue growth in FY2022 without considering significant 5G opportunities in FY2022.