We maintain BUY on Tech Mahindra despite lower than expected revenue and margin performance. The Telecom growth recovery (+6.8% YoY CC in FY20) is slightly derailed due to Covid-19 impact and near-term supply side challenges, but the medium term growth driver remains on track. Positives include leadership position in Telecom, 5G opportunity (slightly delayed) and higher synergies between Enterprise and Telecom. Margin remains a challenge for TechM and the recovery planned for FY21E shifts by one more year. We have cut EPS est. by 6.0/5.7% for FY21/22E and ~31% correction in 3M factors most of the negatives. Our TP stands at Rs 625 based on 13x (~6% discount to 5Y median) FY22E EPS.

Revenue stood at USD 1,295mn (-4.3% QoQ, -3.3% CC), which was below our est. of USD 1,331mn. TechM growth was impacted due to sharp drop in Telecom while Enterprise revenue was in line with expectation.

Enterprise (59% of rev) was down 1.3% QoQ led by TME (-6.8%), Retail (- 3.0%) and Manufacturing (-2.1%) offset by BFSI (+10.9%). The Enterprise segment will have some impact of lower discretionary spending. Highest impact will be felt in Manufacturing and Retail, while lower exposure to Energy and Travel & Transport will limit downside. Large deal ramp-up (albeit slow) in BFSI will support growth.

Telecom growth was impacted due to BPM (-15.6% QoQ), delay in Network roll out services and weak Comviva. Large global players focus remains on network modernisation, ops transformation and 5G roll-outs. These spend could be delayed, as currently the focus remains on keeping the lights on, implementing WFH and data security. BPM is facing supply side challenges (~75% WFH) and 4Q had only two weeks impact.

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EBIT margin contracted 220bps QoQ to 10.0% (est. of 12.0%). TechM margin recovery plan gets derailed due to Covid-19 impact. Margin drivers include reduction in sub-con, vendor management, cut in variable pay and bonus. Cash generation improved, DSO days including unbilled came down to 102 days. OCF/EBITDA improved to 76.1% in FY20 vs. 69.9% in FY19.

Valuation and outlook: Growth recovery in Telecom and Enterprise, large deal wins and margin stability achieved in the first three quarters of FY20, gets derailed in 4Q due to Covid-19 uncertainty. Downtrend will continue in 1HFY21 and discretionary spending will get impacted in the near term. Pricing pressure, furloughs and delay in spend will impact growth and margins in FY21E. We expect these factors to subside in FY22E and TechM can be a beneficiary of vendor consolidation in Telecom segment, where it is an undisputed leader. We expect USD revenue growth of -4.7/+6.8% in FY21/22E. TechM trades at a P/E of 12.9/11.4x FY21/22E (~18% discount to 5Y median).

Shares of TECH MAHINDRA LTD. was last trading in BSE at Rs.502.45 as compared to the previous close of Rs. 546.1. The total number of shares traded during the day was 305809 in over 14433 trades.

The stock hit an intraday high of Rs. 517.65 and intraday low of 498.1. The net turnover during the day was Rs. 154511233.





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