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Tech Mahindra slips over 2% after Q2 result; should you buy the stock?

Topics Tech Mahindra | Q2 results | Markets

Its revenue for the quarter came in at Rs 9,371.8 crore, up 3.3 per cent YoY and 2.9 per cent QoQ.
Shares of Tech Mahindra, the Pune-headquartered information technology (IT) services company, declined as much as 2.6 per cent to Rs 825.70 apiece on the BSE in the early trade on Monday as investors booked profit after the company posted better-than-expected quarterly numbers for the second quarter of the current fiscal year (Q2FY21).

The stock, however, trimmed its losses later and was trading 0.88 per cent lower at Rs 840.60 on the BSE at 09:55 am. In comparison, the S&P BSE Sensex was trading 0.19 per cent lower at 40,606.66 levels. 

The company, on Friday, reported a 5.3 per cent year-on-year (YoY) decline in its net profit at Rs 1,064 crore for the quarter under review owing to higher employee costs and other expenses. However, on a sequential basis, the net profit grew 9.5 per cent.

Its revenue for the quarter came in at Rs 9,371.8 crore, up 3.3 per cent YoY and 2.9 per cent QoQ. In US dollar terms, revenue stood at $1,265.4 million, up 4.8 per cent QoQ and down 1.7 per cent YoY. In constant currency, revenue grew 2.9 per cent QoQ. READ MORE

Should you buy the stock?

Analysts are positive on Tech Mahindra post the Q2 numbers owing to its strong operational performance, attractive valuation, and encouraging management commentary. Here's how leading brokerages have interpreted the Q2 numbers. 

Nomura | Rating: BUY | Target Price: Rs 975

While growth was ahead of our estimates and cash conversion was robust, the bigger surprise came from EBIT margins, which registered a nearly 200bps beat on our estimates. TechM indicated that EBIT margins are likely to remain in the nearly 14 per cent band over the next 2 quarters despite the impact from variable pay and an increase in travel costs. We retain Buy on attractive valuations at nearly 15.2x FY22F EPS, improved capabilities in Enterprise led by organic investments and acquisitions. This coupled with a better go-to-market strategy should allow for better deal participation and medium-term catalyst from 5G-related spends.

Nirmal Bang Securities | Rating: BUY | Target Price: Rs 1,017

Tech Mahindra’s (TML) 2QFY21 performance was ahead of expectation, especially on EBIT margin. Commentary on margin in FY21 has shifted quite a bit over the last few quarters. In December 2019, at the analyst meet, TML was targeting a nearly 15 per cent margin in FY21. That was dropped when the pandemic hit and was shifted as the goal for FY22. In light of a significant margin surprise in 2QFY21 at 14.2 per cent (+410bps QoQ against our estimate of +50bps) and commentary that this could be sustained despite salary and travel cost increases, we have raised our estimates materially for FY21-FY23. While 2Q large deal TCV has been a tad disappointing, we are comforted by commentary around pipeline being at the peak and conversations that it is having with both Telco and enterprise customers on 5G.

Edelweiss Securities | Rating: Buy | Target Price: Rs 1,253

All verticals reported positive sequential growth this quarter. Technology, Media, and Entertainment and BFSI were the strongest verticals with a growth of 14.1 per cent and 9.5 per cent, respectively. The key positive from management commentary is the bottoming out of the key manufacturing sector. Moreover, all geographies delivered sequential growth: Americas/Europe/Rest of World grew 2.9 per cent/2.4 per cent/11.1 per cent. Management sounded extremely bullish on the earnings conference call, indicating that even the verticals/geographies that have been weak till now are now ready to fire.

Tech Mahindra’s efficient execution skills put it in a sweet spot to capitalise on this upcycle. The stock is trading at 17x FY22E. Maintain ‘BUY’ with an unchanged TP of Rs 1,253 (25x FY22E earnings).

IDBI Capital | Rating: Accumulate | Target Price: Rs 972

TECHM’s Q2FY21 result was a beat to our forecast. Revenue grew by 2.9 per cent QoQ in CC (+4.8 per cent QoQ in US$ terms). EBIT margin improved by a whopping ~410bps QoQ to 14.2 per cent (6-quarter high) and was a big beat to our forecast. EPS of Rs 12.2, +9.4 per cent/-5.5 per cent QoQ/YoY was also a beat. In Q2FY21, TECHM has secured large deals with TCV of US$421 mn (US$207 mn in Communications and US$214 mn in Enterprise business). We factor Q2FY21 beat and increase FY21/22E revenue forecast by 2.8 per cent/2.4 per cent, EBIT margin forecast by 354bps/126bps to 12.7 per cent/12.5 per cent, and EPS by 14 per cent/4 per cent. We have introduced FY23 financials and forecast revenue/EPS CAGR of 9.5 per cent/11.4 per cent over FY21-23. We maintain ACCUMULATE with a new TP of Rs 972 based on 16x FY23E vs. the 1-year forward P/E range of 8x-18x in the last 5 years.

Prabhudas Lilladher | Rating: Buy |Target Price: Rs 1,042

With strong beat in margin performance, we revise our estimates by avg: 8 per cent for FY22/23. On 5G theme, we believe TechM to be the biggest beneficiary. Further, TechM’s strong play in network infrastructure services differentiates it from other Indian IT. TM has capabilities in radio frequency planning, design, engineering services, network rollout and post implementation network optimization and support. We believe TechM is well-positioned to capture a fair share of 5G network services spends. We continue to value TM at 17X on Sep-22 EPS of Rs 61.3 to arrive at a changed TP of Rs 1,042 (Old TP: 966) with revenue and earnings CAGR of 9 per cent/14 per cent, respectively. TM is currently trading at 14.5X/13.2X at EPS of Rs 58.4/64.2 on FY22/23E respectively. Maintain Buy.


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