Retain ‘buy’ on TechM due to reasonable growth potential

Contraction in legacy services impacted TechM due to relatively higher exposure.

Building blocks in place. We interacted with Manish Vyas, TechM’s head of communications, media & entertainment business. Key takeaways are — even as there are significant improvements under the hood, growth has been modest in the past few years due to legacy contraction and LCC rationalisation, demand for new technologies and network services with focus on cross-sell will drive growth, deal pipeline is good, M&E practice is nascent but has reasonable growth potential and the company is well set to benefit from 5G adoption. ‘Buy’ maintained.

TechM’s telecom vertical has grown at a modest pace in the past 4-5 years. Management indicated that drag on revenues was on account of a few factors — legacy portfolio. Contraction in legacy services impacted TechM due to relatively higher exposure. Budget constraints from clients due to weak industry growth were additional headwinds impacting revenue growth and margins. Portfolio rationalisation in LCC. TechM acquired LCC in FY2015 to make a foray into network services.

However, the company was forced to let go of several unprofitable contracts leading to material loss of revenue. Slowdown in key clients. Two clients accounted for large share of revenues in FY2015. The largest clients peaked at a far higher number than the company’s expectation. The subsequent period was a correction phase and pretty much on expected lines. These factors have masked the significant improvements under the hood. TechM’s revenues are more diversified today across clients and geos. TechM is already working with most of the ‘must have’ accounts globally. In a way the telecom practice is a lot more de-risked compared to four years back.

TechM indicated that demand was strong for the company’s service offerings in new technology areas such as cloud, data & analytics, front-end CX and new-age BSS. Demand for network services and customer-centric BPO has also been reasonably good in the last couple of years. TechM has a broad swathe of capabilities spanning networks, applications, business process, infrastructure and next-gen services. TechM has a strong client base comprising almost all major service providers in every geography barring China and Korea.