‘Buy’ TechM as outlook for biz is healthy post Covid

We interacted with Alok Palsikar, TM’s head of engineering services in a freewheeling discussion, here are the key highlights. TM 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. TM is taking steps to increase participation in the fast-growing digital engineering space. 5G opportunity, uptick in enterprise growth and margin expansion underpin our positive view. ‘Buy’.

Tech Mahindra’s (TM) engineering services business contributes ~US$700m 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 conceptualisation to drafting) capabilities besides body engineering, powertrain, infotainment systems, ADAS and safety systems to name a few. In aerospace, TM has 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. TM 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.

Engineering services is organised as a strategic business unit (SBU) within TechM. The unit has 14-15k engineers with 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 TM and supported by solutions experts of the engineering team. Learning and development is a focus area for TM.

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. The company provides training in new simulation software and new technologies such as IoT, and cross training in cloud engineering, hardware design and software design to develop talent catering to new industry requirements.

TM 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.