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TechM margins dip; recovery plan in place

ICICI Securities 04 Feb 2022

What’s buzzing:

TechM’s order book continues to be strong at US$700 mn+ for a fourth consecutive quarter. Margins declined due to higher sub costs and lower utilisation.

Context:

The company reported 4.1% QoQ growth in revenues at US$1,533.5 mn while growth in CC terms was at 4.7% QoQ. In rupee terms, revenue grew 5.2% QoQ to | 11,451 crore The revenue growth was aided by CME vertical, which grew 6.2% QoQ while manufacturing & retail, transport & logistics (RTL) grew 13.5% QoQ. BFSI sector declined 1.6% QoQ due to furlough impact. In terms of geographies, Americas reported growth of 6.5% QoQ while growth in Europe, RoW was relatively muted at 2.5%, 1.4%, respectively. EBIT margins for the quarter were down 40 bps QoQ. Margin headwinds for the quarter were i) supply side challenges ii) salary revision iii) higher subcontractor costs iv) lower utilisation. Margin tailwinds for the quarter were i) operating efficiency ii) lower SG&A expenses.

Our Perspective:

The company is a play on continued investment by global telcos on 5G, which includes network upgradation, system integration and cloud services (40% revenue mix). The company’s order book continues to be strong and has been on an upward trajectory for the last few years, which is a reflection of demand momentum. EBIT margins for the quarter were impacted but the company has a recovery plan in place, which includes i) they have identified nine Tier II towns India, from which they have been sourcing talent ii) The company also identified and operationalised few near shore delivery centre in Mexico, Canada, Belarus, Latvia, Costa Rica, Romania from where they have been able to procure talent even for niche skills like cloud, SAP4Hana etc. iii) Elevated fresher hiring at 10,000-12,000 in FY23. We estimate revenue, EBITDA, PAT CAGR of 13.8%, 13.2%, 17.1% CAGR, respectively, over FY21-24E.

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