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Tech Mahindra Ltd>
  • CMP : 1,399.8 Chg : 6.70 (0.48%)
  • Target : 1,130.0 (4.15%)
  • Target Period : 12-18 Month

08 Mar 2023

Margin led focus till leadership change…

About The Stock

Tech Mahindra (TechM) has over 1.2 lakh employees across 90 countries serving 1000+ clients with higher exposure to telecom (40% of revenues).

  • Apart from telecom, the company caters to BFSI, manufacturing & retail
  • TechM has grown organically & inorganically (dollar revenue CAGR of 6.6% over the past five years)
Investor Day Highlights:
  • We attended TechM Investor Day. On leadership transition, the CEO mentioned that he expects transition to be smooth as it is a planned succession and they are currently focusing on margin expansion
  • The company for the first time talked about their Product & Platform (P&P) business, which is at US$450 mn revenues and it is likely to scale up to US$1 bn in the next three years
  • The company is looking at better medium-term outlook on 5G, cloud, sustainability related spending while margins are likely to see a recovery from FY24 onwards
What should Investors do?

TechM’s share price has grown by ~1.7x over the past five years (from ~₹ 612 in March 2018 to ~₹ 1,085 levels in March 2023).

  • We maintain our HOLD rating on the stock
Target Price and Valuation

We value TechM at ₹ 1130 i.e., 13x P/E on FY25E EPS

Key Triggers for future price performance
  • Healthy deal wins, traction in communication segment led by legacy modernisation, 5G, customer care, automation, network and cloud to drive revenues
  • TechM has restructured its Products & Platforms business expects to grow this business to US$1bn in next three years
  • Restructuring of low margin portfolios, acceleration in Europe and improving demand from lift & shift deals to drive 11.6% CAGR in FY22-25E
  • Margins recovery will likely play out from FY24 onwards
Alternate Stock Idea:

Apart from TechM, in our IT coverage we also like Infosys.

  • Key beneficiary of improved digital demand, industry leading revenue growth and healthy capital allocation prompt us to be positive
  • BUY with a target price of ₹ 1,730

Key Financial Summary

Particulars FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E FY25E 3 Year CAGR (FY22-FY25E)
Net sales 36,867.7 37,855.1 44,646.0 8.9 53,340.6 57,543.6 62,006.6 11.6
EBITDA 5,726.1 6,847.0 8,020.0 13.9 8,214.5 9,034.3 10,479.1 9.3
EBITDA Margin (%) 15.5 18.1 18.0 - 15.4 15.7 16.9 -
Net Profit 3,815.6 4,428.0 5,566.1 14.6 5,558.4 6,531.0 7,614.7 11.0
EPS (|) 59.5 50.2 63.1 - 63.0 74.0 86.0 -
P/E 18.2 21.6 17.2 - 17.2 14.7 12.6 -
RoNW (%) 17.5 17.8 20.7 - 18.6 19.5 20.2 -
RoCE (%) 18.3 19.8 22.5 - 20.9 21.8 22.9 -
Source: Company, ICICI Direct Research

Analyst meet highlights

  • The company indicated that Innovation, business transformation continues to be the area of investments from clients. It is seeing mixed indicators globally where on the one side we are seeing layoffs in some global tech companies while on the other end, there has been continuous news flow on investments. The company also indicated that US recession is likely to be not as bad as it was anticipated. Hence, the company is looking for some certainty on investments amid uncertainty around
  • The company indicated that its 5G revenue reached US$1 bn revenues now vs. US$500 mn a year ago. The company indicated that network efficiency and network modernisation to be able to offer 5G, data analytics, customer experience continue to see investments across communication providers, fixed broadband players and media companies. The company indicated that it works with telecom operators in 90 countries and top two to three players in the market have a tie up with Tech M. The company indicated that there are three large operators globally, which are rolling out 5G services in their respective countries (Japan, Germany, US) and TechM is a part of their modernisation, network efficiency, etc
  • The company indicated that it is pausing on M&A for the time being and its current focus is on integration of acquired assets and they are determined to improve profitability. The company also indicated that alliances is also a focus area for it as 30% revenue mix comes from various alliances for the company compared to 40% number for the industry
  • The company indicated following four pillars of strategy to execution:
  1. Growth levers: It is looking to focus on large transformational deals while also looking for few more alliances. They are also looking for portfolio synergies,
  2. Technology bets: The company is betting on following technology bets i) cloud ii) Products & Platforms iii) emerging technologies iv) customer experience & engineering,
  3. Operational Rigor: Automation and EBITDA improvement,
  4. Talent development: Upskilling, career advancement, diversity etc,
  • The company indicated that BPO business has been growing well in the last five to six years (19.5% CAGR revenue growth) due to which its revenue mix has increased from 7% to 12% now. The company indicated that in this business it has added more than $700 mn TCV cumulatively in the last few quarters. Hence, it is expected to report strong growth going forward as well. it is one of the fastest growing services for the company, three sub-verticals within BPO clocked more than US$100mn revenues and two more are knocking the doors for US$100mn as per company. The company also indicated that out of Top 200 accounts they are offering BPO services to only 50% accounts and there is further scope of growth there. The company also mentioned that current buzzword ChatGPT is unlikely to impact BPO business as generative AI is yet to be developed to that scale,
  • The company for first time talked about platform business. The platform business has been there from long time within the company; however, it has now carved out the business separately and Manish Vyas who was earlier leader in the CME vertical has been given a responsibility to drive this business. The company indicated that this business (containing all platforms together) has currently has annual revenue of US$450 mn (6.8% of annualised FY23 revenues) and it is looking to take this business to US$1 bn revenue in the next two to three years
  • Some of the platforms which are developed over the years are:
  1. Under Simplify, it has 3 platforms, 1) netOps.ai: intelligent platform to integrate and management networks, which is helping telecom players for faster network roll-outs. It currently has seven customers under this platform. 2. BlueMarble: It is a SaaS based BSS which has 18 customers currently and has US$45mn ARR (40% growth). 3) iSustain: Intelligent ESG platform, which is end to end ESG related data management, ESG reporting and analytics. Total addressable market for the same is US$1.8 bn
  2. Under Modernise, it has three platforms, 1) yantr.ai: A cognitive platform for transforming field operations, it was launched in September 2022 and three customers while it has an opportunity to disrupt US$30 bn spend 2) CloudBlazetech: It is an integrated cloud platform, which has total addressable market of US$500 bn, which helps in 30% faster cloud migration and has 30+ customers currently. 3) AFTEAZE: It is an aftermarket platform for manufacturing industries for cost take out, more than US$300 mn cost eliminated, it is being offered in 30 countries and 20 languages
  3. Under Monetise, it has three platforms, 1) MobiLytix: A customer value management platform, growing at 30% CAGR and has US$10 bn total addressable market 2) YABX: it is cloud lending and savings platform, which has US$12 bn total addressable market, >1 mn unique customers, >US$100 mn annual loan disbursement 3) Mobiquity: It is a digital payment gateway with 80+ deployments over 50+ countries with US$200 bn transaction values and 150 mn wallets powered
  • The margins for product & platforms business are not currently known but if we take a reference of P&P business margin of its peers, then we may see an upside risk of 150-200 bps on our margin expansion assumption


  • The company communicated the following five things earlier and as per management it has achieved four out of those while there was a miss on margin improvement piece. The company has achieved i) large deals in the range of US$700 mn to US$1 bn ii) double digit revenue growth on YoY basis iii) focus on integration of M&A iv) capital return i.e. FCF net of M&A,
  • The company indicated that quarterly large deal TCV has increased 1.8x i.e., from US$448 mn (average over FY16-20) to US$830 mn (average for last eight quarters ending at Q3FY23) while revenue CQGR has increased 2.4x over the same period. The company indicated that EBIT margin has increased 30bps over the same period,
  • On the EBIT margin he mentioned that the long-term investment to improve the competencies has impacted margins. He indicated the following on the same: 1) The company has invested over US$1.2 bn for acquiring various companies in the recent time to strengthen its capability in cloud, digital transformation, CX, etc. 2) The winning rate in large deals has increased and since initial margins in the large deals are lower impacting overall margins 3) There was an impact of high attrition and the cost for the replacing the talent was very high and also company had to incur significant wage hike to retain talent. He further mentioned that although the company had received rate hike from clients the same was not able to offset the wage hikes and retention costs impacting margins
  • On the organic growth he mentioned that the growth of the company will be aided by its ability to continue to win large deals & expand its wallet share among the existing large clients by offering multiple capability offerings. He also mentioned that the company is changing its investment strategy and it is now doing more internal investments in platforms and investment in newer areas by co-creating with clients
  • On the margin improvement, the company indicated that FY23 EBIT margins are likely to be lower than its FY22 margins i.e., 14.6%. it indicated that for FY24E, the margins are likely to be better than FY23 where tailwinds would be operating efficiency, portfolio rationalisation & earnout reduction, SG&A reduction while there could be headwinds in terms of large deal transactions & wage hike impact. The company indicated that in long term i.e., in FY26, margins are likely to be better than FY22 considering similar tailwinds and headwinds,
  • On the portfolio synergy Manish Agarwal, President, mentioned that TechM is currently focusing on integration of all the acquired companies. He mentioned that TechM had acquired the various companies to scale its capabilities across cloud, hyperscalers, etc. and it is now conducting the integration across various layers like client integration, capability integration, etc. He mentioned that the investments are on track to give anticipated returns although he indicated that its largest acquisition of CTCO was impacted due to shutting down of its operations in a country impacted by Russia-Ukraine conflict. He, however also mentioned that operations of CTCO is now recovering and also mentioned that all the other acquisitions integrations are going as per plans,
  • On the capital allocation policy, the CFO mentioned that company has a policy wherein it will return the any excess free cash flow net of M&A to the shareholders and it will continue with the same. The company has returned 75% of FCF to shareholders in FY21 & FY22, up from average of 54% for the period FY16 to FY20


  • He mentioned that the company’s internal fulfilment improved from 46% in FY22 to 71% in January 2023 and also the quarterly attrition has declined to 14.3% in last quarter which is one of lowest among the peers. He also mentioned that the company has expanded to tier 2 cities, which has helped it to gain talent for niche skills at the right cost. He further mentioned that the company entered into tie ups & partnerships with top universities for upskilling of its employees,
  • On the future focus area, he mentioned that the company will work in the following areas: continue to build delivery capabilities, improve productivity, improve internal fulfilment and focus on improving retention & dropping of attrition level


  • On leadership transition, the CEO mentioned that he expects transition to be smooth as it is a planned succession. He mentioned that current strategy will continue till leadership change and they are currently focusing on margin expansion as near-term growth headwinds are visible however they are looking at better medium-term outlook on 5G, cloud, sustainability and scale up of their platform business,
  • The company indicated that in CME it has added 15 new clients on TTM basis while TCV growth has been strong at 15%. It also mentioned that more than 50% deals are coming from network modernisation, cloud transformation etc. It has also mentioned about 2x revenue growth in media & entertainment space while 5G revenues has clocked US$1bn revenue now in this vertical out of US$2.4 bn (~40%),
  • In manufacturing, which is US$1 bn vertical for it, it won six large deals while 21 new clients are added which includes EV/electrification and ESG related deals. The vertical has reported 12% YoY growth in CC terms on TTM,
  • In BFSI, it has reported 16% YoY growth in CC terms on TTM basis. More than 50% deals in this space are from cloud transformation. It won 6 large deals and 23 new logos,
  • In Hi-Tech it has reported 34% YoY revenue growth in CC terms on TTM. More than 50% revenue is coming from platforms, ISV, semiconductor companies. It won 19 new logos and 7 large deals,
  • In HLS, the company indicated that there is US$225bn spending opportunity in this space which is expected to double in next 7 years. The company has won 13 new logos while it is providing support to 260+ health systems and 800 hospitals,
  • On the M&A strategy the company mentioned although it has paused the M&A program for now it will on case-to-case basis look out M&A opportunity to strengthen its products & platform business
Change in Estimates
  FY23E FY24E FY25E Comments
 (| Crore)   Old   New  % Change  Old   New  % Change  Old   New  % Change  
Revenue   53,341 53,341 0.0 57,544 57,544 0.0 62,007 62,007 0.0  
EBIT 6,241 6,241 0.0 7,366 7,193 -2.3 8,371 8,619 3.0  
EBIT Margin (%) 11.7 11.7 0 bps 12.8 12.5 -30 bps 13.5 13.9 40 bps  
PAT 5,558 5,558 0.0 6,662 6,531 -2.0 7,426 7,615 2.5  
EPS (|) 63.0 63.0 0.0 75.5 74.0 -2.0 83.9 86.0 2.5  



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