Tech Mahindra Rating: buy: Execution was strong in the final quarter

Management is focussing on buyer transformation offers. The inventory is buying and selling at 17.4x FY22e PE. All in all, we preserve ‘BUY/SN’.

Tech Mahindra posted Q4FY21 income progress of 1.6% q-o-q (USD) and 0.7% (CC) to $1,330 mn, decrease than our and Street’s estimates of 1.5% (USD) and 1.9% (cc), respectively. Ebit margin expanded 60bps q-o-q to 16.5%, surpassing our and Street’s estimates of 16% and 15.8%, respectively. Profit declined 18.5% q-o-q to Rs 10,814 mn vis-à-vis our estimate of Rs 12,179 mn. New deal wins throughout the quarter have been at $1,043 mn, up 129% q-o-q.

We count on the deal momentum to remain strong over coming quarters led by the manufacturing and BFSI segments. For FY22, administration expects to ship double-digit income progress and 15%-plus Ebit margin. All in all, we preserve Buy with an unchanged TP of Rs 1,450 (25x Q2FY23e).

Structural shift in direction of digital: All verticals (besides Retail, Transport & Logistics) grew q-o-q in Q4FY21. BFSI, Manufacturing and Communications grew the strongest, up 4.9%, 1.9% and 1.4% q-o-q, respectively. Technology, Media & Entertainment remained flat. By area, Europe and ROW posted wholesome progress of two% q-o-q and 6.2% q-o-q, respectively, whereas Americas slid 1.3% q-o-q. Net new deal-wins have been divided equally between enterprise and communication, and unfold throughout US and EU.

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Operating margin was strong: Ebitda margin, up 40bps q-o-q to twenty%, is its highest in six years, and elevated on the again of operational efficiencies, supply transformation, extra offshoring and better utilisation, which have been solely partially offset by the enhance in SG&A (attributable to hiring). FCF stood at $187 mn in Q4FY21; FCF to PAT stood at 127%. Strong money stream benefitted from decrease DSO, which decreased by three days to 92. Utilisation at 87% is strong and, therefore, prone to average going forward. Tax provision is greater attributable to one-offs at two subsidiaries, which affected PAT.

Outlook: Upcycle to maintain – TECHM has a strong deal pipeline for FY22, primarily pushed by transformational offers and its shut involvement with the 4 hyperscalers. Management is focussing on buyer transformation offers. The inventory is buying and selling at 17.4x FY22e PE. All in all, we preserve ‘BUY/SN’.

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