Shares of Tech Mahindra Ltd. jumped to an all-time high as analysts remained bullish on the software services exporter, citing better margin trajectory, growth in revenue for the communication vertical and a coherent strategy to capitalise on 5G opportunities. The stock, however, soon pared its opening gains.
Tech Mahindra aims to report about 15% EBIT margins in FY22 on the back of accelerating revenue growth, improved performance of acquired entities and automation-led operating efficiencies, it said during an analyst meet as the IT company unveiled the new branding of its strategy ‘NXT.NOW’, underscoring the accelerated need for digital transformation.
“At its core, the strategy continues to be centred around three megatrends, four technology bets and three objectives (the 3-4-3 strategy introduced in 2017),” the company said. “BFSI, retail, healthcare and hi-tech offer a significant growth opportunity and could expand to $1billion+ verticals over the next couple of years. These four verticals along with manufacturing and CME would be the key growth drivers.”
That said, the benefits, according to the company, however, may partly be negated by a salary hike and normalisation of travel and other costs.
Still, analysts expect Tech Mahindra to benefit from 5G and cloud opportunities. “The timeline of an uptick in 5G spending by telecom companies is uncertain. However, valuations are reasonable and underlying business spending drives for 5G are sound,” Dipeshkumar Mehta, analyst at Emkay, said as the brokerage assumed coverage on the stock.
Of the 45 analysts tracking Tech Mahindra, 37 have a ‘buy’ rating, five suggest a ‘hold’ and the rest recommend a ‘sell’. The average of Bloomberg consensus 12-month price targets implies an upside of 9.3%.
Shares of the company rose as much as 3.8% to Rs 910 apiece before cooling off to trade 0.4% higher.
Here’s what analysts had to say:
CLSA
- Maintains ‘buy’ rating; hikes price target to Rs 1,030 from Rs 981 apiece
- Sees 5G as a $63-83 billion opportunity over 2020-2025
- Playing well in the current ‘cloudification’ market
- Maintains target of 15% EBIT margin in FY22 despite likely reversal in travel and employee costs
- Start of a multi-year opportunity is positive and should help valuations
- Intent to increase capital allocation and not hold excess cash should also support a gradual re-rating
Jefferies
- Maintains ‘buy’ rating, with a price target of Rs 1,000 apiece
- Expects pick-up in revenue growth of communication vertical
- Proactive large deal approach, though management will keep a close eye on deal closure timelines
- Expectations of growth acceleration, along with improving margin profile, bodes well for the company’s earnings growth
- Well placed to leverage the 5G cycle
- Model FY21-23E revenue growth of 8.4% CAGR and 19% EPS CAGR over the same period
Morgan Stanley
- Maintains ‘overweight’ rating; with a price target of Rs 980 apiece
- Deal pipeline healthiest in the last four quarters
- Stock can provide 17-18% upside from current levels if management is able to execute on current guidance
- Good play on evolving 5G theme
- Relative valuations are supportive
Emkay
- Assumes coverage with a ‘buy’ rating and price target of Rs 1,070
- Has a coherent strategy in place to capitalise on 5G opportunities
- Demand uptick timeline is still uncertain
- Expects high single-digit revenue growth in FY22
- Expects recovery in communications revenue growth in FY22
- Current valuations adequately captures the uncertainties
- Expects earnings CAGR of about 14% over FY21-23
Motilal Oswal
- Maintains ‘neutral’ rating with a price target of Rs 940 apiece
- Refreshed strategy focusses on cloud and platforms
- FY22 recovery should be modest
- Expects a recovery in communications vertical to precede any re-rating in the stock multiple
- Sees the need to invest back into the business as the key limitation to its aim of margin improvement
- Single-digit growth in FY22 will lead to a lower P/E multiple
Nirmal Bang
- Maintains ‘buy’ rating, with a price target of Rs 1,017 apiece
- An upgrade cycle is likely in the offing
- Cloud opportunity is substantial
- Estimates and target P/E multiple have a greater probability of upward revision in the days to come on possible better execution
- Clear chance of discount to TCS being reduced on proper execution
- Sees earnings acceleration over FY20-23 due to better margin trajectory
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