Buy Quess Corp, target Rs 1350: Shailendra Kumar
Prabhudas Lilladher's research report on Tech Mahindra
Tech Mahindra delivered a strong set of results for 4QFY18 with revenue, EBIDTA margin and PAT above our estimates. Revenues at USD1244 mn were up 2.9% QoQ and above our ests (PLe: USD1240mn). Constant currency growth for the quarter stood at 1.7% QoQ. Telecom vertical (41.6% of total revenues) remained flat QoQ while Enterprise vertical (58.4% of total revenues) grew by 4.9% QoQ. EBIDTA margin at 17.5% was up 128bps QoQ and 550bps YoY and above our ests (PLe: 16.7%). PAT at Rs 12,220mn was 25% above our estimates. Strong PAT beat was also led by higher other income (led by one-off exceptional income from sale of land and higher forex gains) as well as lower tax rate for the quarter. Company continues to trim Employee count. Total Headcount came at 112,807 employees which is net reduction of 2,434 employees QoQ. IT service headcount came at 72,437 employees for 4QFY18 which is down 12% YoY. We believe that Headcount reduction and improvement in margins of subsidiaries (LCC and Comviva) have aided turnaround in margin trajectory in FY18.
Tech M delivered 9.6% USD revenue growth in FY18 (5.7% organic growth and rest owing to acquisitions). Organic constant currency growth for FY18 would be 3.9% YoY owing to softness in telecom vertical led by pruning LCC business. We expect Tech M to deliver 9.5/9.7% USD revenue growth for FY19/FY20E (vs 9.7/9.9% modeled earlier). Led by 4Q margin beat and currency reset (USD vs INR) to lower levels, we upgrade EBIDTA margin assumptions to 16.9/17.3% for FY19E/FY20E (vs 15.5/16% modeled earlier). Our EPS estimates are upped by 11.6/8% for FY19/FY20E to Rs 46.5/51/sh predominately led by margin upgrade. Stock trades at 13.8x FY20E EPS. TP raised by 12% to Rs760/sh (15x FY20E EPS vs 14.5x FY20E EPS earlier). Tech M stock has delivered strong return of 63% over the past one year predominantly led by margin recovery which drove earnings upgrade. With 4QFY18 EBIDTA margin at 17.5%, we believe margin expansion has reached fag end. Recovery in growth in Telecom vertical is key from hereon. Retain BUY.
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