Analyst Corner: Retain ‘buy’ on TechM with unchanged TP of Rs 1,253

By Edelweiss Securities

At its analyst meet, Tech Mahindra management reiterated their confidence on demand acceleration, margin sustainability and improvement. The company expects faster and wider adoption of cloud and 5G—sizable opportunities—in the wake of the pandemic.

The CEO re-emphasised the 3-4-3 strategy comprising Trends — exponential growth of content, intelligent devices and power of new technologies; Big bets — human-centred experience next, business, platform and cloud next approach; Objectives — run better, change faster and grow faster. We believe the strategy is in right direction considering industry-wide acceleration. Maintain ‘buy’ with an unchanged TP of Rs 1,253 (25x FY22E EPS).

The CEO highlighted that the new strategy NXT.NOW is yielding results as evidenced from its $2.46 billion deal-wins and improved profitability. Moreover, the enterprise transformation has accelerated via focus on the tech-centric business models, active ‘variabilisation’ of spend, fast-tracking of digital, and new emerging commercial models for digital proposition. Management also highlighted the immense focus on building the leadership team across geographies to fill in strategic and geographic gaps, which should start paying off next year onwards.

Management highlighted their focus on big bets of the future, particularly in data analytics and AI. The key components of data analytics, i.e. data value management, data on cloud and data monetization are cumulative opportunities worth about $1 trillion.

Similarly, the key components of AI, i.e. advance analytics, cognitive services and conversational AI cumulatively make up a market size of USD100bn; it is growing north of a 20% CAGR. The company highlighted that they are chasing four big bets to dominate the total addressable market in excess of USD100bn. They also highlighted that the deal pipeline is the healthiest in last four quarters and deal-wins are highest in last few years, which enable good visibility on revenue acceleration.

The analyst meet clearly reaffirms the Tech Upcycle thesis—or Techolution—that we have been talking up since May 2020 premised on higher and faster adoption of cloud and digital. The CEO highlighted that higher and faster technology adoption is more structural than temporary.

In our view, while Tech Mahindra suffers from a blip in 5G spends, it merely postpones double-digit growth for the company; the enterprise side of business continues to accelerate though. That said, we continue to believe TECHM’s growth will be lower than its competitors for a year, but forecast that its EPS growth would be highest, which would lead to its re-rating in the near term. Thereafter, growth, in all probability, should pick up too. Maintain ‘BUY/SN’ with an unchanged TP of INR1,253 (25x FY22E EPS).