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Tech Mahindra: Simplifying complex execution; retain ADD

Equirus Securities | 15 Dec, 2017  | Follow Author | Add to my Favourites 
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We  attended  TechM‟s  analyst  meet  in  Pune  wherein  the  company  highlighted  its  new  3-4-3  strategy  to  help  improve  growth  and  margins.  Having  simplified  its  strategy, TechM‟s  focus  now  shifts  to  simplifying  complex  execution.  Key  takeaways  were:  (1) momentum  in  enterprise  business  coupled  with  a  recovery  in  telecom  (driven  by  investments,  base  effect)  could  lead  to  above-industry-average  growth  in  FY19E  as  well,  (2)  execution  rigor  is  the  highest-ever  and  could  drive  OPM  improvements,  (3)LCC  learnings  imply  capital  allocation  could  be  prudent,  and  (4)  EBIDTA/CFO  conversion  could  improve  further  and  aid  payouts.  We  raise  our  margin  assumption which leads to increase in our TP to Rs 527 (14x Mar „19 TTM EPS of Rs 34.1) vs. Rs 516 earlier.

Capital allocation could be prudent: TechM highlighted that LCC learnings have led to  a  change  in  the  company‟s  acquisition  philosophy.  Going  ahead,  TechM  would  be increasingly  diligent  on  (1)  underlying  market  dynamics,  (2)  companies  with distributed  management  teams  and  assets,  while  a  large  number  of  acquisitions could  be  smaller  in  size  and  primarily  to  plug  portfolio  gaps  with  better  realizable synergies.  Prudent  acquisitions  coupled  with  an  improving  CFO/EBITDA  ratio (Exhibit 1) could improve payouts from 38% in FY17.

Retain  ADD: 1HFY18  was  better  than  expectations  and  commentary  continues  to  be encouraging;  faster-than-anticipated  margin  recovery  coupled  with  acceleration  in telecom could present upside risks to our estimates. We retain ADD driven by margin expansion  thesis  which  could  play  out  over  the  next  few  quarters  and  could  help sustain current multiples.

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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.


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