Add Tech Mahindra In Your Stock Portfolio, Steady Demand Continues: Top Brokerage Suggests

HDFC Securities, a top brokerage firm recommends investors to add the stock of Tech Mahindra. This multibagger IT stock has surged by around 135% in the last 5 years. However, this stock fell around 3% today, on weak market cues.

Stock To Buy: Target Price & Financials

The Current Market Price (CMP) of Tech Mahindra is Rs. 1,150. HDFC Securities has estimated a Target Price for the stock at Rs. 1,120. It is a large-cap stock with a market capitalization of around Rs. 105,367 crore.

The company's revenue in FY22 was recorded at Rs. 5,998 b, which is expected to be at Rs. 6,769 b in FY23. Their EBIT in FY22 stood at Rs. 65 b, which is expected to be at Rs. 64.47 b in FY23. The company's adj. PAT in FY22 was recorded at Rs. 55.66 b, which is expected to be at Rs. 51.53 b in FY23.

Stock Advantages: HDFC Securities

"Tech Mahindra has strong competitive and scale advantage in the communication vertical, amplified by the 5G uptick and maintained capex guidance by global telecom operators (AT&T and Verizon). We have factored in USD revenue growth at +12.9/11.8%, considering CME growth at +15.5/14.4% and enterprise growth at +11/9.9% over FY23/24E respectively. EBITM is estimated at 12.2/14.1% over the same period, translating into an EPS CAGR of 8% over FY22-24E. Tech Mahindra's valuation at 15.5x FY24E with >4% FCF yield and dividend yield provide margin of safety. Our target price is Rs. 1,120, based on 15x FY24E EPS (5Y/10Y average at 16x and 15x)," stated HDFC Securities giving the stock an add rating.

Steady demand

Demand continues to be steady, deal pipeline is healthy and there are no signs of recession pressure. There are no specific changes in demand from European region due to geopolitical issue; however, some clients are cautious but have not cut their tech budgets. US is ahead of the race in 5G spending and Japan is also seeing spending in 5G, while EU and APAC are lagging behind in 5G spends. The company is witnessing network transformation deals from telecom

operators. There are some supply-side challenges faced in the manufacturing vertical, HDFC Securities added.

Margin improvement & acquisitions

There will be a 100-bps wage hike impact on margins in Q2 while pricing, off shoring and lower sub-con (in next two quarters) will serve as a lever for margin improvement. Replacement cost is still at an elevated level due to supply-side constraints Tech Mahindra policy is to return 25-30% to shareholders in form of dividend or buyback. The company will focus less on M&A since it has already done a healthy number of acquisitions in the recent past, the brokerage firm mentioned.

Company Portfolio: Tech Mahindra

Tech Mahindra offers innovative and customer-centric digital experiences, enabling enterprises, associates and the society to Rise. They are a US$ 6 billion organization with 158,000+ professionals across 90 countries helping 1262 global customers, including Fortune 500 companies. They are focused on leveraging next-generation technologies including 5G, Blockchain, Quantum Computing, Cybersecurity, Artificial Intelligence, and more, to enable end-to-end digital transformation for global customers. They are part of the Mahindra Group, founded in 1945, one of the largest and most admired multinational federation of companies with 260,000 employees in over 100 countries.

Disclaimer

The above stock was picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.