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

Tech Mahindra posted Q4FY21 revenue growth of 1.6% q-o-q (USD) and 0.7% (CC) to $1,330 mn, lower 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 during the quarter were at $1,043 mn, up 129% q-o-q.

We expect the deal momentum to stay strong over coming quarters led by the manufacturing and BFSI segments. For FY22, management expects to deliver double-digit revenue growth and 15%-plus Ebit margin. All in all, we maintain Buy with an unchanged TP of Rs 1,450 (25x Q2FY23e).

Structural shift towards digital: All verticals (except 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 region, Europe and ROW posted healthy growth of 2% q-o-q and 6.2% q-o-q, respectively, while Americas slid 1.3% q-o-q. Net new deal-wins were divided equally between enterprise and communication, and spread across US and EU.

Operating margin was robust: Ebitda margin, up 40bps q-o-q to 20%, is its highest in six years, and increased on the back of operational efficiencies, delivery transformation, more offshoring and higher utilisation, which were only partially offset by the increase in SG&A (due to hiring). FCF stood at $187 mn in Q4FY21; FCF to PAT stood at 127%. Strong cash flow benefitted from lower DSO, which decreased by three days to 92. Utilisation at 87% is strong and, hence, likely to moderate going ahead. Tax provision is higher due to one-offs at two subsidiaries, which affected PAT.

Outlook: Upcycle to sustain – TECHM has a strong deal pipeline for FY22, primarily driven by transformational deals and its close involvement with the four hyperscalers. Management is focussing on customer transformation deals. The stock is trading at 17.4x FY22e PE. All in all, we maintain ‘BUY/SN’.