Tech Mahindra Share price: Kotak Institutional Equities highlights key pointers for Investors
Tech Mahindra has identified areas of improvements and mapped processes for simplification. The go-to-market approach has become sharper with calibrated investments across client buckets viz, top 60, top 300 and top 650 clients. Emphasis on client mining has increased through cross-sell of services, aided by greater empowerment of client partners. Tech Mahindra has initiated portfolio rationalization in certain geos, services and clients, which will show results in the next 3-4 quarters.
At its annual analysts' day, Tech Mahindra showcased some of the seven offerings targeted at different buyers in a client organization to comprehensively address enterprise IT needs. These will be critical in scaling up verticals and ensuring consistent growth. Tech Mahindra is confident of much improved growth in FY2022 (high single digit, 10%+ in enterprise and high single digit in communications) at 15% EBIT margin. Tech Mahindra stock trades at inexpensive valuations. Recommendation is - BUY. Management is more confident on execution of their strategy.
Tech Mahindra: Moving toward a full service model to create sustainable growth:
Tech Mahindra’s maturity has increased across its seven distinct offerings targeted at different buyers in client organizations to address client needs comprehensively. These offerings are across its six large verticals viz: communications, manufacturing, BFSI, healthcare and lifesciences, retail and CPG and hi-tech. Tech Mahindra is confident of scaling up some of the verticals beyond communication to US $1 bn over the coming years. Tech Mahindra has augmented service offerings through acquisitions, partnerships and organic route- IP, accelerators, frameworks and point solutions. These are essential steps towards becoming a credible full service model and gaining wallet share in client budgets.
Tech Mahindra: Measures underway to create a sustainable and profitable growth engine:
Tech Mahindra has identified areas of improvements and mapped processes for simplification. The go-to-market approach has become sharper with calibrated investments across client buckets viz, top 60, top 300 and top 650 clients. Emphasis on client mining has increased through cross-sell of services, aided by greater empowerment of client partners. Tech Mahindra has initiated portfolio rationalization in certain geos, services and clients, which will show results in the next 3-4 quarters. Tech Mahindra Revenue impact will not be significant but will provide material benefit to margins through exit/ramp down from low profitable deals. Further margin improvement measures are under way by flexing levers around offshoring, WFH, subcontractor costs and portfolio synergies with an aim to reach and sustain 15% EBIT margin in FY2022.
Tech Mahindra: Emphasis on consistent shaping of large deals:
Tech Mahindra indicates that its US $1 bn deal with AT&T and US $900 mn deal with Jackson Life Insurance were proactively shaped by the large deals team. Tech Mahindra has a centralized and empowered large deals team comprising business and financial analysts, deal architects and a deal director working closely with management and client partners to drive large deal propositions. The team is supported by strong internal knowledge management and corporate intelligence practices. Tech Mahindra also engages with external channels such as PE, CxO advisories and industry analysts to generate large deal opportunities. It is focused on deal opportunities from M&A, carve outs, new business model adoption of clients and sole sourced propositions. The deals pipeline has increased by 20% in the past six months, with 73 large deals in the pipeline.
Maintain BUY; Tech Mahindra stock trades at attractive valuations:
Tech Mahindra is well positioned to capitalize on opportunities from cloud adoption by telecom companies. The company has made adequate investments, has defined bets and appears set to capture the opportunity arising from 5G adoption of telcos and enterprise clients.
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Tech Mahindra is on the path to develop a full set of capabilities to capture a larger share of spending in clients.
(1) 5G opportunity
(2) Potential improvement in growth in the enterprise segment
(3) Scope for sustainable margin improvement underpin positive stance.
Tech Mahindra trades at 16X FY2022E EPS and is inexpensive. Maintain BUY Rating.
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