Buy Tech Mahindra; target of Rs 940 - HDFC Securities

Buy Tech Mahindra; target of Rs 940: HDFC Securities

HDFC Securities is bullish on Tech Mahindra has recommended buy rating on the stock with a target price of Rs 940 in its research report dated October 23, 2020.

HDFC Securities’ research report on Tech Mahindra

We maintain our BUY rating on Tech Mahindra, based on better-thanexpected growth and improving margin profile. USD revenue was up 2.9% QoQ CC vs. TCS/INFY/WIPRO/HCLT performance of +4.8/+4.0/+2.0/+4.5% QoQ CC respectively. Telecom was up 3.2% QoQ (in line with our estimate), but Enterprise (+6.0% QoQ) performed better than expected. Growth was led by Technology & Media (+14.1% QoQ), BFSI and Retail bounced back strongly, while manufacturing was stable. BPM recovered strongly (+31.1% QoQ) due to market share gains and reversal in supply-side factors. Net-new TCV improved to USD 421mn, and the pipeline continues to remain strong. The 5G related spend has shifted to FY22E, but TechM is well-poised to benefit from this spend. Telecom recovery will be gradual (led by 5G), but Enterprise will drive growth, supported by a revival in Manufacturing and Retail verticals. Margin expansion of +413bps QoQ was better than expected (14.2% vs. the estimate of 11.3%), led by offshoring, higher utilisation, lower sub-con and visa fees.


TechM aims to expand the margin to 15%, but it will still have the lowest margin in Tier-1 IT. We increase our EPS estimate by 7.1/8.1% for FY22/23E to factor in better growth and margin. Our target price stands at Rs 940, based on 16x (~15% premium to 5Y average) Sep-22E EPS. The stock currently trades at a P/E of 17.0/15.2x FY21/22E.